By Murray Coleman
A super-juiced Direxion fund (FAS) has been leading a rush for the exits by investors from leveraged ETFs. Is it the market, or is it increased regulatory scrutiny?
Inverse and leveraged ETFs took it on the chin last month.
Just look at money flows for domestic-focused equity categories. Leveraged U.S. stock ETFs had nearly $2.4 billion in net outflows in July. At the same time, U.S. long-only equity funds not employing leverage recorded net inflows of $7.8 billion, according to the most recent National Stock Exchange data.
International leveraged equity ETFs had net outflows of $38 million. The same type of funds that didn’t use leverage—just went long—as a group had inflows of more than $3 billion.
More niche corners of the market also couldn't escape fleeing investors. Commodity ETFs using leverage had net outflows of $53 million; traditional long commodity funds had net inflows of $65 million.
The list goes on, but among individual ETFs of all classifications, the Direxion Daily Financials Bull 3x (FAS) was the biggest loser in terms of outflows with some $984 million in July. (Don’t feel too sorry for its sponsor—the ETF still has more than $1 billion in assets.)
As we head into the last half of August, it’ll be interesting to see how sentiment treats this category. Paul Amery, editor of our European Web site, notes in Tuesday’s feature that European investors are already talking about alternative ways to gain leverage.
Also, Deutsche Bank has decided to halt issuing new shares of the PowerShares DB Crude Oil Double Long Exchange-Traded Note (DXO). Although the company wasn't talking, numerous reports pointed to ongoing concerns that the SEC and FINRA were raising the spotlight too brightly to suit Deutsche Bank's comfort level. (See related story here.)
As if that wasn't enough, also on Tuesday the SEC and FINRA issued a joint statement officially warning investors against the dangers of leveraged ETFs. (See more here.)
Public flogging of sophisticated investment vehicles by regulatory bodies are sure to be an ongoing saga. Still, it might be worth keeping an eye on some of last month’s other big losers (by net outflows in July):
- ProShares Ultra DJ Financials (UYG) $336 million
- ProShares Ultra S&P 500 (SSO) $377 million
- Direxion SmallCap Bull 3x (TNA) $64 million
- ProShares Ultra QQQ (QLD) $87 million
- ProShares Ultra DJ Basic Materials (UYM) $101 million
- Direxion LargeCap Bull 3x (BGU) $99 million
- Direxion Energy Bull 3x (ERX) $78 million
It seems like a good bet that most of the reasons for traders fleeing these funds had to do with market forces rather than regulatory fodder. Still, some interesting blips showed up in the monthly flows data. It will take more time to monitor the situation to see any patterns developing. But one thing seems to be clear—ETF investors are no better in making short-term moves than mutual fund investors. Consider that:
- While the 200% leveraged UYG had net outflow during the month, the nonleveraged SPDR Financial ETF (XLF) had net inflow ($269 million). And even though both funds go in the same general direction—long only—XLF had net outflows through the opening seven months of the year totaling $1.3 billion. By contrast, the 200% leveraged UYG had net inflows of $678 million year-to-date.
- The SPDR S&P 500 (SPY) had net inflows of slightly more than $3 billion in July. Meanwhile, the 200% leveraged SSO went the other direction with net outflows. Over the course of a full year, SSO had more than $1.4 billion in net outflows; SPY also had relatively heavy outflow topping $27.4 billion—more than double outflow totals at the same time last year for the industry’s biggest fund.