ETF Trends
ETF Trends

With President-elect Donald Trump being sworn in on Friday, the exchange traded fund industry, especially the leveraged and inverse segment, could enjoy more favorable treatment as many anticipate the new administration could cut back on regulation and even roll back financial industry reforms.

“There is a lot of discussion about how the new administration may weaken or even reverse many of the reforms that the commission and our fellow financial regulators have implemented since the financial crisis,” Mary Jo White, the outgoing head of the Securities and Exchange Commission, said in what is likely her last speech as head of the agency. “That is a concern that I very much share.”

White will step down when Trump takes office Friday, reports Renae Merle for the Washington Post.

Trump has already tapped Wall Street lawyer Jay Clayton to replace White at the top of the SEC, which immediately drew criticism from Democrats and progressive groups, who pointed to Clayton’s history of representing some of the biggest names on Wall Street, including Goldman Sachs, and helping them weather regulatory scrutiny.

With a more anti-regulation administration coming in, talks of a likely limitation on leveraged and inverse exchange traded funds may not pan out.

ETFs that utilize derivative financial tools to achieve their intended strategies have drawn greater scrutiny from regulators. However, the investment vehicles have been working as intended for more sophisticated investors whom understand the tools.

In the wake of the 2008 financial downturn and subsequent environment of heightened volatility, the Securities and Exchange Commission began reviewing derivatives usage in mutual funds, ETFs and other investment companies to determine whether additional safeguards are required.

More recently, some market observers contend that leveraged ETFs impose systemic risks on the market, especially during times of heightened volatility, such as the recent so-called mini flash crash. While some have been wary about how leveraged and inverse ETFs impact the financial markets as they rebalance portfolios, the concerns may be largely overblown.

All of this is old news as the world has changed. We have witnessed new highs in assets for leveraged and inverse ETFs, along with record trading volume to support tight trading spreads. There is also greater demand for hedging as the equities market heads toward its ninth year bull rally and the fixed-income ends its three-decade bull run.

ETF investors are also becoming more sophisticated and knowledgeable about what they are getting themselves into. Many are more comfortable with investing in alternative hedging products, like inverse and leveraged ETFs, as part of a refined investment discipline.

The industry now only waits on wirehouses to relinquish their parental control over traders and allow qualified advisors to utilize inverse and leveraged ETFs. Different isn’t always bad and not everyone needs to use the inverse/leveraged tool, but it is suitable to how many of these short-term tactical traders invest. Stock jockeys still trade using options and behave in a way that mimics leveraged and inverse strategies.

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