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.