- ETFs that implement derivative financial tools have drawn greater scrutiny from regulators
- Leveraged and inverse ETFs are being used as trading products over the short-term
- Investors are taking both sides of the trade, or long bullish and short bearish positions during market turns
Investors have utilized exchange traded funds that track leveraged and inverse strategies as they were intended, enhancing portfolio positions or capturing a downward trending market.
ETFs that implement derivative financial tools have drawn greater scrutiny from regulators. However, the investment vehicles have been working as intended for more sophisticated investors whom understand the tools. [What The SEC Derivative Proposal Means for Leveraged & Inverse ETFs]
Analysis of market activity for leveraged and inverse ETFs illustrates that the investments have been used properly since they were registered in 2006, serving their intended purpose for suitable investors.
“People are using them the right way,” David Fajardo, Senior Vice President of Direxion Investments, told ETF Trends in a call.
Fajardo pointed out that leveraged and inverse ETFs are being used as trading products over the short-term and are not being used as long-term, buy-and-hold investments. Additionally, investors are taking both sides of the trade, or long bullish and short bearish positions during market turns.
For instance, in a note, Paul C. Brigandi, Managing Director and Head of Trading at Direxion, pointed out three popular contrarian bets that have cropped up this year, including the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST), Direxion Daily Energy Bull 3X Shares (NYSEArca: ERX) and Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU).
DUST shares outstanding have substantially increased during the rally in gold, which suggests that some are calling the surge in bullion and miners overdone. DUST has attracted $420 million in net inflows so far this year, according to ETF.com.
ERX shares outstanding have substantially increased during the crude oil sell-off as traders tried to catch a falling knife and timed a market bottom. ERX added $75.3 million in net inflows year-to-date.
LABU shares outstanding have also substantially increased over the course of the correction in the biotechnology sector. Biotechs have yet to rebound along with the broader market. LABU saw $132.6 million in inflows so far this year.
“While these are no definitive moves, it could be contrarian trades,” Andy O’Rourke, Managing Director and Chief Marketing Officer at Direxion, told ETF Trends on a call. “They reflect definite bets. People are constantly looking at the market; they are not set-and-forget type trades.”