Leveraged exchange-traded funds have been offering investors more and more bang for their buck. But while funds that triple daily returns recently became a hit, that doesn’t necessarily mean quadruple funds are on the way.
Since so-called leveraged and inverse ETFs appeared in 2006, the pattern has been clear. Investors like funds that offer the chance for bigger and bigger gains – despite the risk of bigger losses.
While the fund industry has so far responded by upping the ante, experts say even more extreme funds would face design hurdles, such as extra costs and problems tied to market volatility. Unless someone uses a new blueprint, current levels of leverage could be the limit.
“We have no plans to launch products with higher leverage points,” says Andy O’Rourke, marketing director at Direxion Funds, which created a stir last year by launching funds that multiply daily returns by three. “If you had four-times or five-times (leverage) it would make it more difficult to run the fund.”
Direxion’s chief rival, ProFunds Group, wouldn’t comment on product plans. Rydex Investments, a third firm that offers leveraged ETFs, said multiples of four or five are “not something were looking at.”
Investors’ preference for the high-proof stuff became clear early on. When ProFunds launched the first bear and bull ETFs three years ago, it offered two types that let investors bet against the market: “inverse” funds that rose 1% if the market fell 1% and “double inverse” funds that rose 2% in the same scenario. (All long funds were double.)
Almost immediately, the double-inverse proved a bigger hit than the simple inverse, collecting more assets and racking up larger trading volumes. ProFunds’ rival Direxion was able to capitalize on that preference last November by launching three-times funds, that have already pulled in nearly $4 billion from investors, according to data from the National Stock Exchange.