Leveraged ETF Debate Hits the Mainstream

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 |  Includes: DXD, QID, SDS, SPXS, TZA
by: Bespoke Investment Group

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

Click to enlarge