While market volatility has increased along with the number of leveraged exchange traded funds available, the high-octane investment products aren’t responsible for the market’s dramatic twists and turns.
Leveraged ETF products use derivatives and swaps to mimic 200% or 300% of the price movements of an underlying benchmark. Critics say that the growing popularity of the ETFs is affecting price movements in the underlying holdings. However, the volatility of leveraged ETFs has shown to be greater than that of the underlying indices they try to reflect, writes Micahel Rawson, ETF analyst at Morningstar. [What Are ETFs? — Leverage Increases Risk]
Furthermore, leveraged and inverse ETF products combined hold around $32 billion in assets. In comparison, U.S.-listed ETFs have over $1 trillion in assets, while mutual funds hold around $10 trillion in assets. [Do Leveraged ETFs Really Exacerbate Volatility?]
Rawson points out that if leveraged and inverse ETFs amplified volatility, assets within the funds would rise or fall along with peaks and troughs in market volatility. However, leveraged and inverse fund assets have been relatively flat, moving between $30 billion and $36 billion, despite new product launches.