Leveraged exchanged traded funds and notes are perhaps the most controversial investment products that are widely accessible on the market today. For several years now, investors have read articles and watched television reports detailing that when leveraged ETFs are held for extended time frames, they deliver performances that are far different from and usually much worse than the indexes they track.
Yet despite the warning flags, the temptation of potential gains of 8%, 10% or more in a single trading is hard for some investors to ignore. “We now have hundreds of ETFs and ETNs that offer leverage in both 2x and 3x versions. Some of the biggest fund providers include ProShares, Direxion Funds, Barclays,PowerShares, and more,” writes David Fabian for NASDAQ OMX.
Fabian notes that as of June 30, the three largest ETFs held a combined $8.21 billion in assets. That group is comprised of the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), the ProShares Ultra S&P500 (NYSEArca: SSO) and the ProShares UltraShort S&P500 (NYSEArca: SDS). Maryland-based ProShares is the largest issuer of leveraged and inverse ETFs, though the firm has been working to expand its lineup of more traditional ETFs. [ProShares Could Introduce Dividend ETF]
While leveraged ETFs may be popular, that does not mean they are always properly used. Although ProShares and rival Direxion overtly tell investors on their web sites that leveraged ETFs are short-term trading vehicles that seek to deliver daily returns that correspond to select indexes, those warnings can go ignored.
Earlier this week, the 2nd U.S. Circuit Court of Appeals rejected a lawsuit alleging leveraged ETF provider ProShares failed to adequately disclose the funds’ risks. More alarming may be the fact that U.S. stocks have soared, some leveraged bearish ETFs have seen noticeable inflows. [Court Rejects Suit Against ProShares]
For example, the ProShares UltraPro Short QQQ (NasdaqGS: SQQQ) and the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ) have hauled in a combined $542.3 million in assets this year, according to Index Universe data.