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The long and short of it: How investors are getting burned by leveraged ETFs
by Robert St George on Oct 01, 2013 at 07:51
This structure also makes them tricky for hedging. A 10-times leveraged short ETF could superficially be considered a cheap way to buy downside protection on a long portfolio.
The daily reset, however, means that it will not provide the inverse correlation required. Its value would be eroded each day that the long positions made money, such that in a sudden crash its hedging effect would be marginal.
All this should give those hoping to deploy leveraged ETFs for quick profits based on thematic or tactical trades pause for thought.
However, many investors are charging in regardless.
Nik Bienkowski, joint chief executive of Boost ETP, divulges – without being able to share specific details – that in recent weeks one investor has ploughed nearly £12 million into an ETF that shorts European equities with three times leverage.
Over the past three months, the index tracked – the Euro Stoxx 50 – has risen more often than it has fallen on a daily basis, finishing the period up by 13%.
More broadly, leveraged ETF investors are more equivocal. The latest figures compiled by Boost ETP reveal that of the £22 billion held in leveraged equity ETFs globally at the moment, 54% is long and 46% is short.
With European equities, 40% of the £2.7 billion in leveraged ETFs is long and 60% is short. Among commodities, investor sentiment is also split: in this £2.8 billion sector, 59% is long and 41% is short.
Boost ETP’s numbers also highlight just how tactically traders are using leveraged ETFs. Those with three times gearing are on average held for three days, and those twice geared are typically held for 10 days.
David Norman, co-founder of TCF Investment, stresses that such products should only be used by wealth managers who have specific mandates requiring leverage.