Leveraged and Inverse ETFs: A Japanese Precedent?

There has been much talk lately about the unique new ETFs being offered by ProShares. Not only can individual investors now buy inverse ETFs that correspond to the opposite of the daily performance of the index, but they can also buy leveraged inverse ETFs that correspond to twice the inverse of the daily performance of the index (effectively allowing investors to conveniently double short the market, even in non-margin accounts). The ETFs offer plenty of new strategies that every day investors have had trouble executing in the past, so we wondered if the availability of these new short products would have any impact on markets.

To date, trading in the new ETFs has been relatively illiquid, and therefore they have likely had little impact on the market. Regardless, they bring back memories of the Japanese market during the late 1989 and early 1990 period. Back then several brokerage companies introduced listed warrants on the Nikkei stock market, thereby allowing individual investors the opportunity to short an asset class that they previously had little or no access to, namely Japanese stocks.

Whether or not the puts caused the decline in Japanese stocks or the drop in Japanese stocks led to the listing of the warrants is certainly open to debate, but one cannot deny the similar timeframes in which both events occurred. We would also remind readers that the current US market probably has more differences than similarities with the Japanese market of 1989, however we thought readers would be interested nonetheless (click to enlarge):

Comments

[Elliott:]

"To date, trading in the new ETFs has been relatively illiquid..."

ProShares seems to think otherwise. I have to agree with them, these new ETFs seem to be catching on quickly.
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ProShares ETFs Daily Trading Volume Exceeds 1 Million Shares; Reaches mark in two-and-a-half weeks
8:00 AM EDT July 12, 2006

ProShares today announced that its recently launched exchange traded funds (ETFs) exceeded 1 million shares in daily trading volume for each of the last two days--just 13 trading days after their June 21 launch. The eight ProShares ETFs trade on the American Stock Exchange(R) (Amex(R)).

2006 Jul 19 01:33 AM