Leveraged ETF Debate Hits the Mainstream

For the last few weeks, we have made several comments both on this site and for our Premium subscribers on the increased impact that leveraged ETFs are having on the market, and more specifically, trading during the last hour of the day. Yesterday morning, the WSJ ran an article on the topic with a similar argument to the one we made several weeks ago. The conclusion was that the market's direction during the last hour of the day has been a continuation of the intraday trend that was in place heading into the last hour of the day. In other words, if the market was down significantly at 3PM, it has been heading lower in the final hour, and vice versa for up days.

In addition to the market building on gains (or losses) during the final hour of trading, increased volatility is another impact of the increased popularity of these leveraged ETFs. In the chart below, we compared the average high/low spread of the S&P 500 at hourly intervals throughout the day since the beginning of June, and also since the introduction of triple leverged ETFs in early November.

As shown, volatility over the last month has increased for every time interval, but the biggest increase in hourly volatility has been in the last hour of the day. While other factors could certainly be contributiong to the pick up in volatility, it's hard to dismiss the increased popularity of leveraged ETFs as just a coincidence.

click to enlarge

Comments

[DaveW:]

Was hoping for a leveraged article, you know, two articles packed into this space...

2008 Dec 16 09:42 AM

[Hodarius:]

Leveraged ETFs don't deal in actual stocks, so they have no effect on stock prices. (They will, however, affect the market for options, futures, and swaps.) Volatility in general has been skyrocketing since September, well before the triple ETFs were introduced.

2008 Dec 16 02:20 PM

[Tristan Yates:]

Not enough money in leveraged ETFs to move the market, especially considering the daily rebalancing effect is only a fraction of the value of the fund.

2008 Dec 16 02:46 PM

[Augustus:]

For the earlier hourly periods, the vol seems to have gone up by about 70%. Multiply the June last hour range of 1.8 by 1.7 and the result is 3.06. What is not normal about the increase relative to the other periods?

2008 Dec 16 08:56 PM

[Illusional ...:]

Like some mentioned, I don't see a point to this. The ETFs move in response to the movements of the stock or the index, not the other way round. I would agree if one says that some people wrongly used these ETFs as judges to how the index is doing but that is purely speculative. The value of the ETF is by its NAV which is based on the stocks, again, not the other way round.

2008 Dec 16 09:03 PM

[Bunnynose:]

I love the leveraged ETFs!!! YEAH!! Ok... now for something profound... if you trade these you are gambling.

2008 Dec 16 11:05 PM