SEC Applies Its Own Leverage on Exotic ETFs

by Todd Shriber

Market volatility increased last month, so say the fine folks at the Securities and Exchange Commission, and now the government agency is looking for answers why.

More specifically, the SEC is evaluating whether leveraged, inverse and leveraged-inverse exchange-traded funds were behind some of the gut-wrenching moves seen last month, according to The Wall Street Journal.

Leveraged ETFs come in both the double and triple variety, meaning traders can earn double or triple the daily percentage performance of a particular index. Obviously, the inverse funds deliver double or triple the daily inverse performance of those indexes.

Leveraged ETFs are frequently used by professional traders. But they have also become popular with the retail crowd, and that may be what has the SEC worried, the article said. For its part, the SEC has long warned investors about the risks of these juiced-up ETFs. In fact, there’s an entire section of the SEC’s website devoted to this sub-sector of the ETF universe.

Despite the warnings and the criticism, leveraged ETFs remain popular. At the end of August, ProShares and Direxion, the two largest U.S. issuers of inverse and leveraged ETFs, sponsored a combined 173 funds. The bulk of these funds are leveraged and/or inverse, and had about $33 billion in assets under management combined, according to data from the National Stock Exchange.

Whatever the issue, the SEC may just be looking to “open a dialogue” regarding exotic investments, the Journal reports. That’s nice. Dialogue regarding the fact that leveraged ETFs are daily instruments is provided by Direxion and ProShares.

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