In the ongoing search for returns, investors are piling into a “volatile and sometimes dangerous” group of ETFs, according to a recent article in The Wall Street Journal.
The article cites Morningstar data showing that through the first 10 months of the year, leveraged and inverse ETFS—which can double or triple daily returns and offer investors the chance to profit from an index’s inverse movements—have drawn $16.3 billion, reportedly on track to top 2008’s record of $16.7 billion.
According to the article the features of these risky ETFs have “proved popular in this year’s stock market rally. Stimulative efforts by the U.S. government to support the economy have created a springboard for stocks to surge since the market cratered in March.”
According to CFRA head of ETF and mutual-fund research Todd Rosenbluth, “These products are ripe for investor attention. People see the strong performance and think, ‘I want that too.’ The market environment is conducive to leverage, but investors should be very careful.”
The article reports that some long-term holders of leveraged ETFs have been “burned in dramatic fashion,” adding that investors lost millions in 2018 after a surge in volatility and sudden, huge losses in some leveraged funds and other ETF products. Such incidents reportedly raised questions about whether investors fully understand the risks inherent in these products.