Market observers have been wary about how leveraged and inverse exchange traded funds impact the financial markets as they rebalance portfolios, but the concerns may be largely overblown.
“There is a false narrative about leveraged and inverse ETFs being spread by the prudential regulators,” Mike Piwowar, a member of the Securities and Exchange Commission, said at a Investment Company Institute conference, Reuters reports.
Leveraged and inverse ETFs utilize derivatives contracts to enhance daily index returns. For instance, most leveraged ETFs are designed to produce double or triple the performance of the underlying market on a daily basis while inverse options reflect the opposite moves to a benchmark. [Do You Know How Your Leveraged ETFs Work?]
Some are concerned that these products have raised the stress in the financial market, fueling volatility and wild swings in stocks. However, these concerns may be wild conjectures.
“It is the unsubstantiated assertion that these products contribute to increased volatility in the financial markets because they must rebalance their portfolios in the same direction as the contemporaneous return on the underlying assets in order to maintain a constant leverage ratio,” Piwowar said.