ProShares: All Out Defense Of Leveraged ETFs

by on July 31, 2009

ProFunds Group, the parent company of the ProShares line of leveraged and inverse ETFs, has stepped up its defense of its products it the wake of increased scrutiny of their performance and news that a number of brokerages (including Edward Jones, Ameriprise, and UBS) have suspended the purchase of such products on behalf of their clients. In an open letter posted on its web site, ProShares notes that “how these funds perform for periods longer than a day – particularly in volatile markets – has been raised as a concern in numerous recent press articles.” ProShares believes that leveraged funds have been getting a bad rap as of late, noting “these performance concerns have been subject to a great deal of misunderstanding.”

ProShares acknowledges on its web site that “because of the daily objective of leveraged and inverse funds, investors should monitor their performance, as frequently as daily.” But the firm stops short of saying that its funds are for short-term use only. Direxion, one of ProShares’ main competitors (Rydex also offers leveraged ETFs), has gone a bit further, noting on its Web site that “Direxion Shares ETFs seek daily investment goals and should be used as short term trading vehicles.”

As part of its efforts to promote understanding of its products, ProShares has also highlighted a few facts and fallacies surrounding leveraged ETFs at the present. Among some of the biggest misunderstandings of these products:

  • Leveraged ETFs don’t do what they’re supposed to do. In reality, leveraged ETFs do an excellent job of doing exactly what they set out to do. The problem is that they don’t perform how investors who don’t take the time to read about the nuances of these products think they might. For some data I compiled on the performance of these funds, click here.
  • When held for multiple trading sessions, leveraged ETFs will underperform the daily target multiple. Again, this is untrue. In trending markets, leveraged ETFs will often outperform the daily target multiple. Problems arise in oscillating markets – where gains are followed by losses and vice versa. Since leveraged funds reset daily, they increase their exposure following gains and decrease it following losses. In seesawing markets, this can lead to underperformance.

While I don’t necessarily share ProFunds’ view that leveraged ETFs can be held for multiple trading sessions, I do agree with them that their products have been the victim of a lot of bad press. Leveraged ETF issuers have gone to great lengths to educate potential investors. And for every tale of retail investors getting burned by these products, there are scores of sophisticated investors who think they’re the greatest invention since sliced bread. A movement is currently underway to restrict access to leveraged funds, a move that I actually  believe will be good for fund issuers and average investors alike.

Disclosure: No positions at time of writing.