Leveraged and inverse exposure ETFs in the US require investor education says CFRA’s Ullal
Aniket Ullal, Head, ETF Data & Analytics, CFRA has published a note on the launch by AXS Investments of seven ETFs that provide leveraged and inverse exposure to single stocks such as Nvidia, PayPal, Nike, Pfizer, and Tesla.
Ullal notes that it marks a new phase in the evolution of the US ETF market and is likely the precursor of more products of this type. Asked if these products are understood by investors, Ullal says: “These single stock ETFs appear to be intended for a retail audience since institutional traders already have access to over-the-counter derivatives that allow them to take leveraged positions on individual stocks.
“There is a segment of retail investors that is quite sophisticated and trades actively and may be able to use these products appropriately. The risk is larger for those retail investors who do not monitor their portfolios regularly and hold these products for extended periods of time. That group may not yet fully understand the mechanics of short and leveraged ETFs.”
However, Ullal confirms that there is an appetite for them. “There is currently USD68 billion invested in leveraged and inverse ETFs in the US as of July 15, 2022, which is a sizeable asset base,” he says.
“These are typically linked either to diversified equity indices or commodities. It indicates there is an appetite for leveraged ETFs in the US. Although it is too early to tell, given the interest that specific names such as Tesla or Meta tend to receive, particularly around earnings season, it seems reasonable to assume that there will be interest in leveraged and inverse single stock ETFs as well.”
The concern is that while leveraged and inverse exposure ETFs provide opportunities for institutional and retail traders with a strong directional view on a stock to implement their investment thesis through a liquid, exchange traded instrument, these products could be risky for those investors who hold them for long periods without understanding the mechanics of daily rebalancing.
Ullal notes that, although the ETFs were approved by the SEC, both Commissioner Crenshaw and Lori Schock, the SEC’s Director of Investor Education, released separate statements expressing concerns. Their concerns centred primarily around the daily rebalancing of leveraged and inverse products.
Ullal concludes that investor education around these products will be critical as they are introduced into the market.