Since the introduction of leveraged ETF’s we have been a very strong critics of the use of such instruments, now the SEC is opening an opinion period, which we intend on voicing our concerns.
Recall, ETF’s are mostly baskets of investments, mimicking indexes, that trade during the day, very similar to stocks. When these instruments began to attract investor attention we championed some of them as the liquidity, tax efficiency, and pure investment focus, was, and still is, in some cases, very appealing to us.
Here is a chart of the elder statesman of ETF’s, the SPY, with its target twin index, the S&P 500. There are two lines on the chart, however they are so closely related it is hard to tell.
S&P 500 V SPY
Not Very Many James Bond Sequels!
Excluding one of my favorites, James Bond’s 20 plus, rarely does even a second generation sequel produce the quality of it’s parent. ETF’s are not much different, as leveraged ETF’s are, in our opinion, the flop sequel to their parent.
The following is a chart of a leveraged 3 x ETF, versus the Russell 2000, it’s target base twin.
Direxion 3X V Russell
Of course a 3X levered ETF should not exactly match it’s twin index, however, is should nearly replicate it, except with 3 x the movement, which in this chart you can see, is not happening. In addition to bad matching, and possibly most importantly, these products, we believe, are adding to the volatility of the capital markets.
Bottom line, we fear more investors are being hurt than helped by these leveraged ETF’s, and as such, are happy the SEC is opening a comment period. We will let you know if our comments are posted by the SEC.
Have a Great Day!
JK