The Popular Leveraged ETF Goes Global (Europe)

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June 23, 2009 3:21pm ETF BASIC NEWS

europeLeveraged ETF’s are a growing phenomenon that investors can’t seem get enough of.  There are many critics of these investing tools, as some investors use them as a gambling vehicle or don’t know what they are investing in.  The gain in popularity of leveraged ETF’s has now sent them global.  Europe has launched the first leveraged funds to follow their indexes. 

“All of the new funds will be issued utilizing ETF Securities “third generation ETF model,” which the firm believes will offer increased price compettion, enhanced liquidity, and reduced counterparty risk for investors. This third generation model diversifies index replication across a consortium of the industry’s strongest financial institutions, whereas “second generation” ETFs use only a single counterparty. “First generation” ETFs replicate index returns by replicating the underlying holdings, thereby introducing potential tracking error resulting from rebalancing costs. Commenting on the launch of the new funds, Hector McNeil, head of sales and marketing at ETF Securities said, “It is clear that the continued issuance of ‘third generation’ ETFs give investors peace of mind during these turbulent times.” With the launch of these funds, ETF Securities now manages 140 exchange-traded products with $12 billion in assest, establishing itself as one of the leaders in Europe’s ETF industry,” Reports Michael Johnston from SeekingAlpha.

“The concern over leveraged ETFs is that while they offer sophisticated investors a powerful short-term investment tool, they are being used by both “average Joe” investors and dangerously ignorant financial advisers who do not understand exactly how these instruments work. While leveraged ETFs generally do an excellent job of tracking the daily performance of their target indexes, due to the compounding returns, performance over any period longer than a day can vary (sometimes significantly) from the amplified return on the underlying benchmark. ETF Securities fully acknowledges that these funds have a relatively narrow target audience, peppering warnings and disclosures throughout its literature on these products as well as its web site. ETF Securities notes that their funds are “only suitable for sophisticated investors who understand leverage, compounded daily returns, and are willing to magnify potential losses,”  Johnston Reports.

Johnston continues to say “Despite similar warnings and transparency from the primary U.S. issuers of leveraged ETFs, ProShares and Direxion, however, concerns over misuse continue. It will be interesting to see how these funds are received in Europe (I’m guessing they will be tremendously popular) and how much scrutiny they receive from both the public and the industry regulators. Hopefully our friends from across the pond will be able to provide some insight as to how we might solve the dilemma posed by these securities.”

Full Article: Here


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