Thursday, January 26, 2012

President and CIO of Direxion admits that leveraged ETFs are not appropriate for most investors

By Tim Husson, PhD

Today Seeking Alpha posted an interview with Dan O'Neill, President and CIO of Direxion, one of the first and best known issuers of leveraged ETFs. Readers familiar with our work on leveraged ETFs (see post here, paper here) know that we feel these products are almost always unsuitable for retail investors.

Surprisingly enough, Mr. O'Neill agrees completely:
The leveraged indexed ETFs are used by very tactical investors, and so there we have bull and bear funds. They have daily betas, which means that essentially they’re to be used by people expressing a very short-term view of the markets.

They’re not appropriate for investors. You have to have the right attention span and risk tolerance, and essentially, they’re good for traders. They’re not really good for investors.
We couldn't agree more. He adds later:
I think that most market participants should not use these products…and I’m not sure what the proper number is, but let’s just say 95% of market participants should not use these sorts of products. Because they’re looking to invest for longer than the timeframe for these sorts of products.
In fact, the distinction he draws between traders and investors is a useful one. Traders with an opinion on short term (really, single day) movements can use leveraged ETFs to accelerate those returns, which may be easier to buy and sell than options. But due to the compounding effects we and others have noted for years, these are not products that should be bought and held for any extended period of time.

Despite increasingly explicit disclosures, educational resources from issuers (such as these from ProShares), and statements such as the above, we still very often see brokers fill investors' portfolios with leveraged ETFs and other complex products. Fortunately, the consensus seems to finally be swinging in the right direction.

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