Reports that leveraged ETFs will disrupt market are overblown

blahblahLeveraged exchange traded funds are clearly not for everyone, especially if you are of the buy-and-hold mind-set. But claims that these feisty newcomers threaten to ignite extreme market volatility don’t quite add up.

This particular brand of ETF is designed to give short-term traders leveraged long or short exposure to a variety of indexes.

The Direxion Daily Large Cap Bull 3X Shares (BGU), for example, seeks to replicate 300% of the daily performance of the Russell 1000 Index. On the short side, the UltraShort QQQ ProShares (QID) offers traders exposure to twice the inverse of the daily performance of the Nasdaq 100 Index.

Although the basic concept has been around as a niche mutual fund strategy since 1994, the ETF version emerged in 2006 and is quickly gaining appeal.

So much appeal, in fact, that some critics are jumping to the conclusion that a strategy that represents less than $35 billion could — under extraordinary market conditions — wind up contributing more than 75% of late-day trading volume.

The general premise is laid out in a 23-page report released last month by Barclays Global Investors of San Francisco, a unit of Barclays PLC in London.

The cause for concern regarding the leveraged ETFs, according to report co-authors Minder Cheng and Ananth Madhavan, focuses on the portfolio re-balancing that takes place at the end of each trading day.

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