Leveraged exchange-traded funds were devised in 2006 as a product to allow retail investors to double their exposure to stock indices, then bonds, commodities, currencies and volatility itself. With dreams of great upside, these products attracted retail capital like bugs to a light. Bringing in $72 billion in new cash over the past few years, their level of assets has stayed about the same because they tend to burn through money in the long term due to the daily resetting of leverage. From gullible, weak hands, to insiders as usual… the retail carnage has been brutal. Read: SEC may regret the day it allowed leveraged ETFs:
The problem with leveraged ETFs is that the losses from daily rebalancing are not easy to quantify. They’re dependent on volatility: the more volatile the underlying index, the more quickly the ETF will “decay.”
…While retail investors were slow to pick up on the daily rebalancing feature, the quants were not, and what ensued was a giant transfer of wealth from retail investors to professional investors. Professional investors figured out that you could be short leveraged ETFs and actually benefit from the effects of the daily rebalancing.
Here is the key lesson take away, that individuals forget at their peril:
..the whole point of Wall Street is to have a transfer of wealth from the unsophisticated to the sophisticated. There is nothing un-American about that. But this is egregious.
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