Are ETFs Creating a Spike in Market Volatility? (SPY, QQQ, DIA, VXX)

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September 13, 2011 10:25am NASDAQ:QQQ NASDAQ:QQQQ

Over the past 3 months, the CBOE Volatility Index (VIX) has more than doubled, going from 17 to its current level hovering around 40 today. This is a clear indication that the

broader stock markets have been a full of nervous energy and trading, making 2% market swing seem modest.

While investors can point to any number of fundamental, economic or political developments as the catalysts for the mania, some have argued the sheer growth of exchange traded funds or “ETFs” are creating the higher volatility level. In particular, the Wall Street Journal reports that the Securities and Exchange Commission is looking into leveraged ETFs – which enable investors to take long and short positions and can offer 2 to 3 times the amount of exposure to a specific index.

“Leverage and inverse ETF’s represent only 4 to 5% of overall trading volume in the market,” says Tom Lydon, president resident of Global Trends Investments. He says once you “peel back the onion,” you see a totally different situation.

For starters, Lydon says a big chunk of leveraged ETFs are focused on fixed income positions. “So you’ve got a lot of money that’s moving into leveraged Treasury ETFs, so if you take those off the table and balance out the longs and the shorts – which tend to be, on any given day, pretty well balanced – you find out that the overall net volume that’s rebalanced everyday in these products is minimal at best,” explains Lydon.

See the full “Breakout: interview below:


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