Market Overview

Who Loves Ya, Baby? Retail Investors Smitten With Leveraged ETFs (FAZ, FAS, SDS)


With the broader market slightly lower in midday trading, the ProShares UltraShort S&P500 (NYSE: SDS), the double-leveraged inverse answer to the S&P 500, is trading modestly higher. That's not all that interesting, but what is interesting is who is likely pushing SDS higher.

It's probably NOT hedge funds or prop desks. The theory that inverse and leveraged ETFs are primarily used by professional traders has been dispelled. Instead, it is retail investors that love these volatile products according to Barron's.

As Barron's "Focus on Funds" column reports, citing Deutsche Bank, two-times inverse, three-times inverse, and twice-leveraged ETFs are about 85% held by retail investors. In fact, when it comes to triple-leveraged ETFs such as the infamous Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) and the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), the retail investor use of such funds jumps to 91%.

The breakdown for unleveraged inverse ETFs is more tame at 73% retail and 27% institutional, Barron's reported.

Oddly enough, it's NOT hedge funds that primarily use triple-leveraged ETFs on the professional side. Investment advisers represent two-thirds of of all institutions using three-times inverse funds and roughly half the other leveraged and inverse categories, Barron's notes.

Arguably, this is a dangerous trend because previous research indicatesmany registered investment advisers aren't exactly proficient in ETFs to begin with, but they're putting clients' money on the line with riskiest exchange-traded products.

Posted-In: Long Ideas News Broad U.S. Equity ETFs Short Ideas Specialty ETFs Barron's Intraday Update Markets


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