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TWM

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 unless we address a few key issues. [click to continue…]

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Grading Leveraged ETF Performance

by Michael Johnston on June 11, 2009

Leveraged ETFs are among the most actively-traded securities on any market in the world today, with some turning over several times daily and maintaining average investor holding periods of less than an hour. And their popularity appears to be on the rise, as these funds regularly top the list of monthly ETF inflows released by the National Stock Exchange. The amount of interest in these funds certainly isn’t surprising – the temptation to double or even triple the daily returns of a well-known benchmark is tempting, especially for day traders who make their living moving in and out of positions with a frequency that would make most buy-and-hold investors faint. But to generate amplified returns, leveraged ETFs utilize a number of complex strategies that don’t always ensure perfect results. But just how close do they come? [click to continue…]

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