Are Leveraged ETFs Putting Cracks in Market Close?

Are Leveraged ETFs Putting Cracks in Market Close?

- in ETFs, Markets



Jason Zweig, author of the Intelligent Investing at WSJ.com discusses the effect that leveraged ETFs may be having on the market's closes. Here is an excerpt:

At 3 p.m., do you get queasy just thinking about the toll that the final hour of trading might take on your portfolio?

New research suggests that on days when the indexes make big moves, leveraged exchange-traded funds could trigger a trading cascade, turning the market close into a buying or selling frenzy.

To be fair, there has been no meltdown -- yet. But as the financial crisis has intensified since last fall, the final hour of the trading day has felt rougher than ever.

Leveraged ETFs offer double or even triple the daily return of a market index. Some of them, called "inverse" ETFs, move opposite to the market -- for example, going up twice as much as an index goes down. Each day, they all adjust their exposure by rebalancing, or "releveraging," their positions.

Read the whole piece here.