Leveraged products rebalance daily, which forces the funds to trade in the same direction as that of the market. For instance, during a market up day, long and short funds are required to buy, which may contribute to the overall market gains. However, investors also lever their positions in the fund’s inverse counterpart, which would help bring theeaffect of leveraged/inverse products on the markets back to zero, Rawson notes.
Academics have also found that there is little evidence to show derivatives or short selling could cause market volatility. On the contrary, some experts believe that derivatives and short selling may even correspond with lower volatility. [Nasdaq Exec Says Don’t Blame ETFs for Market Swings]
For more information on leveraged products, visit our leveraged ETFs category.
Max Chen contributed to this article.