Leveraged ETF Myth Debunked: Trending Markets Aren’t Impossible
Monday, April 5th, 2010Michael Johnston submits:
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 their objectives and efficiency. Reports of financial advisors and individual investors realizing big losses on products held during the volatile downturn trickled out, and leveraged ETFs were painted as mysterious black boxes that delivered wildly unpredictable returns.
