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Reviewing Three Different Types Of Leveraged ETFs

Michael Johnston — Mon, 13 Dec 2010 15:31:38 +0000

As the popularity of ETFs has surged in recent years, the manner in which investors use these vehicles has evolved as well. Originally designed with cost-conscious buy-and-holders in mind, ETFs have now been fully embraced by more active traders as well (just look at the turnover of SPY). And recent years have seen the introduction of increasingly complex and powerful exchange-traded products, including those offering exposure to investment strategies and asset classes that were previously out-of-reach for most investors. The leveraged ETF space is one example of a corner of the market that has seen tremendous growth in recent years. The basic purpose of these products is relatively straightforward; they seek to deliver results equivalent to the return on a specified index multiplied by a leverage factor (-100%, 300%, etc.) over a certain time period. For those who understand the objectives and limitations of leveraged ETPs, these securities can be [...]

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The Shocking Truth About Leveraged ETFs

Michael Johnston — Mon, 05 Apr 2010 14:56:04 +0000

The SEC’s recent decision to take a closer look at the use of swaps and other derivatives by exchange-traded products and mutual funds has once again thrown leveraged ETFs under the microscope, as regulators begin examining the tools and strategies employed by these products to accomplish their objectives. During the study, approval of any ETFs that “particularly rely on swaps and other derivative instruments to achieve their investment objectives” will be halted, a move that will bring expansion of two of the fastest-growing corners of the ETF market–leveraged and active ETFs–screeching to a halt. The decision also brings back memories of last summer, when leveraged and inverse ETFs came under intense scrutiny for their performance during the tumultuous markets of late 2008 and early 2009. As the popularity of leveraged ETFs surged–several of these funds became among the most actively-traded securities in the world–some rather serious allegations were made surrounding [...]

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UNG’s Wild Year

Michael Johnston — Mon, 28 Dec 2009 15:51:28 +0000

The United States Natural Gas Fund (UNG) has found itself at the top of a number of lists this year. The natural gas fund has been one of the most popular exchange-traded products, with cash inflows to date in 2009 of $5.4 billion, more then four times the assets UNG maintained only a year ago. From a performance perspective, it’s also been one of the most disappointing: despite a furious rally in recent weeks, UNG has been crushed by regulatory uncertainty, contango in futures markets, and perhaps even its own popularity in 2009, losing more than 50% of its value so far on the year (see the complete list of worst performing ETFs in 2009). UNG has also been one of the most volatile ETFs of the year, regularly posting big gains or losses in a single day. In fact, UNG has gained or lost at least 1% 192 times [...]

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September Performance Debunks Leveraged ETF Myth

Michael Johnston — Wed, 07 Oct 2009 08:00:48 +0000

Over the last year, leveraged ETFs have been the subject of intense scrutiny from a number of parties, including regulatory agencies, state governments, broker-dealers, individual investors, and even class action lawyers. While several aspects of leveraged ETFs have been thoroughly analyzed and debated, perhaps no issue has drawn more attention than the effects of compounding returns when held for multiple trading sessions. Because most leveraged ETFs seek to provide amplified returns on a daily basis, they reset their exposure to the underlying benchmark on daily. As a result, the performance of leveraged ETFs over multiple trading sessions depends not only on the movement in the reference benchmark, but on the direction of the markets during that time period. In seesawing markets, returns can vary significantly in magnitude and even direction of changes in the fund’s reference index (see our Free Guide to Leveraged ETFs for a more thorough discussion). Unprecedented [...]

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FINRA To Increase Leveraged ETF Margin Requirements

Michael Johnston — Wed, 02 Sep 2009 08:15:14 +0000

In a step apparently intended to calm some of the fury surrounding the sale and use of leveraged ETFs, the Financial Industry Regulatory Authority (FINRA) announced Tuesday that it will raise margin requirements for leveraged ETFs beginning December 1. Regulatory Notice 09-53 states that “in view of the increased volatility of leveraged ETFs compared to their non-leveraged counterparts, FINRA believes higher margin levels are necessary.” Leveraged ETFs have become tremendously popular among investors over the last year because of their ability to deliver amplified daily returns on popular benchmarks. The controversy over these funds has largely centered on their performance when held for multiple trading sessions in oscillating markets. Due to daily resetting and compounding of returns, the returns on these funds over periods longer than a day depend on both the change in the underlying benchmark and its volatility. Some investors who failed to read up on the risks [...]

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Most Popular ETFs: Leveraged, Financial ETFs Among Winners

Michael Johnston — Tue, 21 Jul 2009 06:05:54 +0000

The old saying “any publicity is good publicity” certainly seems to ring true in the ETF industry. Over the last several months, leveraged ETFs have been the subject of intense scrutiny, first from individual investors and analysts, and more recently from regulatory agencies such as FINRA. Despite allegations that these funds are dishonest products that end up harming average investors who don’t understand their nuances, many leveraged exchange-traded products are among the most popular securities in the world, indicating that while they have their share of detractors, they have found widespread acceptance among certain investor groups. Most Popular ETFs While State Street’s SPDR S&P 500 (SPY) and Select Financial Sector Fund (XLF) are the most heavily-traded ETFs, leveraged funds from Direxion and ProShares dominate the top of the list, accounting for half of the top ten ETFs by average daily volume. Because of the complex way these ETFs are structured, they are [...]

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How To Fix the Leveraged ETF Mess

Michael Johnston — Fri, 26 Jun 2009 11:00:28 +0000

Leveraged ETFs have quickly become the hot-button issue in the ETF industry, dividing investors and observers into two distinct camps. On the one side are sophisticated day traders who believe these funds, which use derivatives and other complex financial instruments to provide amplified daily returns on a target index, are the greatest thing since sliced bread. And on the other are those who accuse these ETFs of being fundamentally dishonest in nature – products that, in the words of legendary investor Jack Bogle, “verge on insanity.” Personally, I fall somewhere in between, believing that leveraged ETFs can be an incredibly powerful tool for sophisticated investors, but acknowledging that there exists the potential for these funds to be used in a detrimental manner by investors unaware of exactly how they function. And while I’m generally inclined to let things be, it’s becoming increasingly clear that this issue will not be going away any time soon [...]

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Responding To Calls For ETF Regulation

Michael Johnston — Tue, 16 Jun 2009 05:30:35 +0000

In the week during which the Obama administration will unveil details surrounding its plan to revamp the regulation of the U.S. financial sector, calls for increased oversight of the ETF industry are picking up steam as well. Scott Burns, director of ETF Analysis at Morningstar, recently laid out a case for increased regulatory requirements for ETFs that use derivatives to achieve their objectives. But I’m not quite convinced that more regulation is the answer. In The Beginning… The first ETFs were equivalent to “plain vanilla” financial instruments, tracking well-known equity and fixed income indexes by duplicating their underlying holdings. Even today, the simplest ETFs remain among the most popular – the indexes tracked by the largest ETFs by market capitalization should be familiar to almost all investors. But as the ETF structure became more familiar and investors became more educated on the advantages of ETFs relative to traditional mutual funds, the [...]

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May ETF Summary: Return to Old Form

Michael Johnston — Wed, 10 Jun 2009 14:04:55 +0000

After growing at a torrid pace in 2008, the ETF industry had showed signs of slowing down through the first four months of 2009. But May represented a return to old form, with more than $14 billion in new assets flowing into ETFs during the month according to Morningstar, the largest monthly inflow of the year so far. This compares to $3.3 billion in net inflows in May 2008 and $9.5 billion during the previous month. Emerging markets ETFs continued to lead the way in May, attracting nearly $5 billion in assets (35% of total inflows). Five of the top ten gaining funds were emerging market funds, led by iShares MSCI Emerging Markets Index (EEM), which attracted more than $1.1 billion alone. It appears that optimism over a global recovery is leading investors to more risky equity ETFs on hopes that these funds will outperform domestic funds. Leveraged and inverse ETFs [...]

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ETF Database » SSO

Reviewing Three Different Types Of Leveraged ETFs

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