Volatility Sparks Inflows To Inverse, Leveraged ETFs

No genre of exchange-traded fund comes with caveats, warning labels and controversy that accompany inverse and leveraged ETFs, but that is not stopping traders from pouring capital into these products.

In fact, the recent dose of volatility digested by market participants during the third quarter stoked fresh inflows to inverse and leveraged ETFs.

Inverse And Leveraged ETFs = $70.1 Billion

At the end of the third quarter, the combined assets under management across the world's inverse and leveraged ETFs was $70.1 billion, a 14.4 percent year-to-date increase, according to data from Boost ETP, a unit of WisdomTree, the fifth-largest U.S. ETF sponsor.

The data indicate that traders are not shy about using leverage, as 54 percent of the assets held by inverse and leveraged ETFs are allocated to those funds that are either double- or triple-leveraged.

In terms of S&L asset allocation, equity ETPs are the most popular with 72 percent of AUM, followed by debt with 12 percent and commodities with 9 percent. The remainder is allocated between currency and alternative ETPs, said Boost.

Currently there is $50.7 billion of AUM held in S&L equity ETPs, an increase of 15 percent YTD. 63 percent of equity ETPs globally are held in leveraged (long) ETPs, 37 percent in short ETPs.

Beyond Equities: Other Asset Classes

Although equities are the dominant asset class among leveraged ETFs, select bond funds have been embraced by traders as ways of betting on the Federal Reserve raising interest rates.

For example, the Direxion Daily 20 Year Plus Treasury Br (NYSE:TMV) has added nearly $206 million in new assets this year. TMV is designed to deliver triple the daily inverse performance of the NYSE 20 Year Plus Treasury Bond Index (AXTWEN).

The Influence Of New Product Launches

Thanks in part to a spate of new product launches this year, the number of inverse and leveraged ETFs around the world has rapidly proliferated. At the end of the third quarter, there were 1,068 inverse and leveraged ETFs with over $71 billion in combined assets under management, according to Boost data.

That is up from 509 such funds with less than $42 billion in combined assets at the end of 2010.

Some new inverse and geared ETFs are proving to be quick successes. For example, the Direxion Daily CSI 300 China A Shares Bear 1X Shares (NYSE:CHAD) debuted right before Chinese stocks swooned, giving traders good reason to make this ETF one of this year's most successful rookie funds.

Likewise, traders have been quick to pump cash into the Direxion Daily S&P Biotech Bull 3X Shares (NYSE:LABU), which debuted in the second quarter, in an effort to catch a rebound in biotech stocks.

At the end of the third quarter, the ProShares Short S&P500 (ETF) (NYSE:SH) and the ProShares UltraShort S&P500 (ETF) (NYSE:SDS) were the two largest inverse and leveraged equity ETFs with $2.1 billion and $1.7 billion in assets, respectively, according to Boost data.

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