Leveraged Funds: Tail Not Wagging the Dog, ETF Analyst Says | ETF Trends

Allegations that leveraged exchange traded funds are somehow responsible for the elevated volatility in the stock market recently are way off base once the category’s relative trading volume and assets are considered, says a respected ETF analyst.

Although ETF transactions accounted for about 40% of the total volume in equity markets in August, leveraged funds represented only about 13% of total ETF trades during the most volatile period early in the month, says Scott Burns, director of ETF research at Morningstar. Leveraged funds account only 5% of total ETF assets.

Leveraged ETFs in the grand scheme are “a grain of sand on the beach,” Burns told CNBC on Wednesday.

The Securities and Exchange Commission is looking into whether leveraged ETFs magnified the volatile swings the stock market experienced last month, The Wall Street Journal reported.

In a telephone interview this week, Burns said the tail is not wagging the dog, and that fire directed at leveraged ETFs may be an instance of confusing correlation and causation. [Don’t Blame ETFs for Market Swings]

“The media has a thirst to find a boogieman to explain why stocks don’t always go up,” the analyst said.