According to a recent Credit Suisse report, Ana Avramovic, vice president of Credit Suisse, stated that the criticism comes from a lack of understanding of the investment product, reports Chris Flood for the Financial Times.
Due to daily rebalancing requirements, leveraged ETFs will always buy or sell underlying components in the same direction the markets are moving. There is an equal chance that the market could reverse direction in the final hours of trading, Credit Suisse analysts found.
“If leveraged ETF rebalancing were truly driving the market, the [price]trend should always continue into the close,” Avramovic said in the FT story.
Additionally, ETF trading volumes are higher at the opening of a trading day, whereas overall volume in U.S. equities wanes toward the end of the day.
“What may be behind the shift is an increased use of VWAP strategies,” Avramovic added. VWAP, or volume weighted average price, is a trading benchmark used by pension plans. If a trade is lower than the VWAP, it is considered an optimal trade.
“Since the end of the day sees higher volume, it plays a larger role in determining the VWAP. It is therefore easier to achieve VWAP by trading at those times,” Avramovic said. “Of course, that process then creates positive feedback, generating more and more volume near the close.”
For more information on leveraged funds, visit our leveraged ETFs category.
Max Chen contributed to this article.