tag:blogger.com,1999:blog-5465015914589377788.post1817030635150082193..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Can Leveraged ETFs Cause Market Instability?Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5465015914589377788.post-35016837742930353172011-11-04T07:13:34.780-04:002011-11-04T07:13:34.780-04:00@Michael: yes, exactly. I'm still trying to r...@Michael: yes, exactly. I'm still trying to reconcile that with my intuition that the bear fund should be the opposite of the bull fund...Patrickhttps://www.blogger.com/profile/16816252455472704262noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51536773500241873832011-11-02T12:18:52.379-04:002011-11-02T12:18:52.379-04:00@Patrick: For me the counterintuitive part was th...@Patrick: For me the counterintuitive part was that both the bull and bear ETFs drove instability in the same way.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-86376995230615528822011-11-02T12:09:31.326-04:002011-11-02T12:09:31.326-04:00Wow, this is extraordinarily counterintuitive. Th...Wow, this is extraordinarily counterintuitive. Thanks for pointing it out.Patrickhttps://www.blogger.com/profile/16816252455472704262noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-70982267135965818632011-11-02T08:11:47.572-04:002011-11-02T08:11:47.572-04:00@Gene: I agree. Simple ETFs that own a broad ind...@Gene: I agree. Simple ETFs that own a broad index are for investors. Leveraged ETFs are for traders who (hallucinate?) that they can see short-term future market direction.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-21511456003665132012011-11-01T23:46:19.292-04:002011-11-01T23:46:19.292-04:00All this frenetic rebalancing is poison to investm...All this frenetic rebalancing is poison to investment returns as a previous post of yours illustrated. How often does a plain-vanilla ETF rebalance, only when the underlying index components change? If so, it seems these plain ETFs are much more efficient at minimizing costs.genehttps://www.blogger.com/profile/05608927986297939720noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-13210881777095509322011-11-01T11:34:53.454-04:002011-11-01T11:34:53.454-04:00@Mark: It's good to see that an option guy co...@Mark: It's good to see that an option guy confirms my contention that derivative trading moves the underlying stocks. I agree with your point that typical investors do not understand how the daily reset affects long-term returns in leveraged ETFs.<br /><br />@Value Indexer: My guess is that market impact is largely driven by the amount of money invested in leveraged ETFs, which is not very high right now.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-35002055459928517022011-11-01T10:40:46.336-04:002011-11-01T10:40:46.336-04:00Leveraged ETFs are a strange thing since they rese...Leveraged ETFs are a strange thing since they reset every day. Just as this prevents them from truly matching the market performance over a longer period like 3-12 months, I doubt they have the full market impact we would expect.<br /><br />Real leverage does of course. If someone borrows money 3 to 1 (or 30 to 1 if they're an investment bank) to bet on a decline in the market for a year they should have a bigger impact than someone using a leveraged ETF.Value Indexerhttp://valueindexer.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-69044622824080501492011-11-01T10:38:37.175-04:002011-11-01T10:38:37.175-04:00Whether they trade derivatives or stock, leveraged...Whether they trade derivatives or stock, leveraged ETFs do move stocks at the close of trading.<br /><br />But more importantly, these products are not understood by the individual investor (who fails to read the fine print). These are for day trading ONLY and not for longer-term investing.<br /><br />In my opinion, these products are poison and serve no useful purpose. It it really that difficult or expensive for the customer to trade twice as many shares of the single, regular, unleveraged ETF?Mark Wolfingerhttp://www.mdwoptions.com/Premium/home-page/noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-25701173471073589502011-11-01T08:34:44.470-04:002011-11-01T08:34:44.470-04:00@Dan: It's true that the exposure is often do...@Dan: It's true that the exposure is often done with derivatives. However, some fraction of derivative trading drives trades in the underlying asset. So even in cases where exposure is achieved with derivatives, there is some added pressure toward greater swings in the underlying. That said, I doubt that the effect is very great.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-87039324214575392992011-11-01T01:30:36.066-04:002011-11-01T01:30:36.066-04:00Thanks for the mention, and for these examples. On...Thanks for the mention, and for these examples. One issue I did not discuss is that most leveraged and inverse ETFs primarily get their exposure through derivatives, so they are not necessarily trading any stocks directly. The hedge fund manager who said that these ETFs "have to rebalance themselves by buying and selling millions of shares within minutes" was not accurate in most cases.Canadian Couch Potatohttp://canadiancouchpotato.comnoreply@blogger.com