ETF Trends
ETF Trends

In Japan, the world’s largest leveraged exchange traded fund is growing too large to control.

Nomura Asset Management Co. will halt subscription orders for its Next Funds Nikkei 225 Leveraged Index ETF, along with two other funds, from Friday, stating that underlying liquidity is not deep enough to ensure the leveraged products can meet their target strategy, Bloomberg reports.

“It seems that the ETF has become too big and is moving the market, and that they’re unable to secure the liquidity they need,” Michiro Naito, an equity derivatives and quantitative strategist at JPMorgan Securities Japan Co., told Bloomberg.

Next Funds Nikkei 225 Leveraged Index ETF tries to generate two times the multiple of the Nikkei 225 Index. The leveraged ETF has gathered ¥733.6 billion, or $6.2 billion, in assets under management with an average daily volume of 10.9 million shares, according to Morningstar. In contrast, the largest U.S.-listed leveraged ETF is the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) with $2.7 billion in assets under management.

The Next Funds Nikkei 225 Leveraged Index ETF has become a popular way among Japanese investors to squeeze returns, attracting a surge of inflows, which has also made the leveraged ETF the largest player in Japan’s futures market. Assets under management have doubled in just five months even while the underlying benchmark flopped 13% from the June peak.

Consequently, some market observers are concerned that the sudden interest in the the leveraged ETF may be exacerbating price volatility.

Leveraged or geared products try to generate the multiple returns of a given market by taking on leverage through derivatives instruments. Most leveraged ETFs are designed to produce double or triple the performance of the underlying market on a daily basis. Consequently, more investors have turned to the geared products to generate bigger profits during volatile market conditions, but it should be noted that traders are exposed to greater downside risks since losses are also magnified. [Do You Know How Your Leveraged ETFs Work?]

Since ETFs typically place orders near the end of the trading session to more closely follow their underlying benchmarks on a day-to-day basis, some market observers have blamed the leveraged products for fueling late-day volatility. According to Bank of America Corp.’s Merrill Lynch, the Japan-listed leveraged and inverse funds have to buy or sell $285 million near the close for every 1% move in Japanese equities.

For more information on geared products, visit our leveraged ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.