Leverage is like Marmite in the world of ETFs - you either love it or you hate it. Recent figures from Barclays Stockbrokers show leveraged long and short ETFs featuring in the top 10 most popular purchases by retail investors, with a ‘super short' FTSE 100 strategy coming in second place.
These products, however, are seen by many as short-term trading vehicles only suitable for sophisticated investors able to frequently monitor markets.
The UK’s Financial Services Authority has gone as far as to warn leveraged ETFs are ‘generally unsuitable’ for the retail market, putting them on a par with complicated structured products. The industry regulator has even proposed publishing a list of products – potentially including leveraged ETFs – to be considered unfit for retail investors from the outset.
Concern largely stems from the fact leveraged long and short products imply the delivery of ‘two-times’ the index performance, although returns can vary widely depending on the time horizon of the investor. Daily rebalancing means the ‘two-times’ index performance is generated on a daily basis and not necessarily over longer periods.
However, RBS has recently unveiled monthly leveraged ETFs, which smooth returns over longer periods, making leveraged performance consistent for periods greater than one day.
Time will show how popular these monthly rebalanced funds become among retail, but in the meantime there is clearly demand for leveraged ETFs, as the stockbroker’s figures show. With more leveraged products in the pipeline and rising investor demand, it would be wise for the FSA to encourage education rather than denigrate these products and risk casting a shadow over ETFs.
After all, this is one of the vehicles they say advisers should consider in line with the Retail Distribution Review and are likely to become a popular, mainstream proposition for retail investors.
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