- BOOST response following the comment made by Blackrock Chairman/CEO Laurence Fink
- Short and Leveraged ETFs are market access tools and do not drive the market
- Circa $61.5bn of global assets under management in Short and Leveraged ETFs is inconsequential compared to $2 trillion in ETFs which is less than around 5% of global mutual fund assets
- Investors who use Short and Leverage ETFs often use them to hedge their portfolios, therefore helping prevent short term sell offs
- Short and Leveraged ETFs have significant benefits compared to other forms of leveraged trading
- Clear and accurate ETF education by providers is a key driver to the growth of the market
BOOST ETP, A WisdomTree Company and Europe’s award winning, specialist Short and Leverage (S&L) Exchange Traded Product (ETP) provider felt it very timely to state the positive case for the Leveraged ETP industry in response to the negative public commentary made by Blackrock Chairman/CEO Laurence Fink’s on Wednesday 28 May 2014.
Short & Leverage ETPs (S&L ETPs) are structurally sound, serve an important role in the market for tactical traders and investors, and have performed this role admirably during some of the most volatile and stressful periods in recent market history.
BOOST is taking the opportunity to respond to Larry Fink’s recently reported comments because it believes they reflect a serious misunderstanding of the S&L ETP structure. Mr. Fink’s comments lack necessary distinctions between operational and regulatory practices of various S&L product types and geographic markets; they also lack a sense of scale relative to other structured products which makes hyperbolic claims of S&L ETP structural risk quantifiably untenable, and misdirected. Simply put, S&L ETP net exposure, AUM and rebalance-driven trading are insignificant in the scheme of global equity markets.
First of all ETFs (Exchange Traded Funds) are essentially market access tools. Historically, they do not invent trading or investment strategies, but rather give investor’s tools to use to express them. S&L ETPs have a total of $61.5bn of assets under management (AUM) globally mostly in extremely liquid underlying asset classes such as the S&P 500 and Gold. This $61.5bn represents less than 2% of total global ETF AUM, which itself is only about 5% of global mutual fund AUM.
Perhaps more importantly, S&L ETPs are a small fraction of assets and trading volumes compared to other derivative products such as margin trading, prime brokerage, CFDs/spread bets, futures, options, structured products, certificates, warrants, swaps, shorting, stock lending and other products and services provided by the large global banking and asset management houses. Iinterestingly, the leverage factor employed by S&L ETFs is usually 2x or 3x the return of the index. This is an extremely low leverage compared to the leverage employed by some of the instruments listed above which can be up to 20 times or more.
BOOST ETP believes Leveraged ETFs provide a valuable trading and investment tool for sophisticated investors. Some of the major features of leveraged ETFs are as follows:
- Leveraged ETFs trade on Exchange and settle similar to equities. Many other forms of leverage trading is considered over the counter transactions
- Leverage ETF investors cannot lose more than their original investments
- Leverage ETFs do not require complex documentation and systems in order to trade or invest in
- Leverage short ETFs allow investors to hedge the long investment positions in a relatively straightforward fashion
BOOST ETP is a strong believer that the main driver to the growth of the global ETF market will be the education of the broader investor community. It is extremely important that all ETP providers do their best to provide accurate and factual information to ETF customers to ensure they are as informed as they can be prior to trading. BOOST ETP have extensive educational aids on its website and through its various industry events including its ‘Advisor Tool Kit’, Leverage ETF investment/trading simulator, ‘Eight things to know about S&L ETFs fact sheet’ and a tutorial and exam question bank designed for Advisors and Investors.
Hector McNeil, Co-CEO had this to say:
“Leverage ETFs have been in the market for almost 10 years now and provide a valuable tool for investors and advisors. There are some clear benefits for most investors that are well understood. Leverage ETFs compare very favourably to other forms of leveraged trading with its core advantages being its exchange tradable and an investor can’t lose more than their original investment.
“We believe S&L ETPs represent an important innovation. For certain investors these products offer a number of potential benefits, from capturing daily positive or negative returns, to cost-efficient hedging, quick market access as well as the facilitation of more sophisticated tactical trades. We welcome the evaluation of S&L ETP structure and mechanics and believe such fact-based analysis will lead to a better understanding of their unique features from which investors may benefit.“