Beating Up InverseLeveraged ETFs is Fake News

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.