According to this article in the Financial Times today, more institutions in Europe are embracing “non-delta one” ETF products to manage increasing market volatility. More widely known as leveraged or inverse products, these ETFs have attracted some negative scrutiny from regulators and critics who say they’re too complex and can cause added volatility in markets.
Non-delta one ETFs aren’t to be confused with the action-packed Chuck Norris film, Delta Force – but the name is certainly a lot more headline friendly than “inverse” or, worse, the l-word – leverage -which has proven to be a bit of a turn-off for investors in this post-crisis landscape.
Whatever the name, inverse ETF products are on the rise — the most heavily traded ETF in Europe last year was an inverse Dax product run by Deustsche Bank; the seventh most traded US ETF was also an inverse product, the Direxion daily financial 3x bull. Non-delta one strategies are designed to do the opposite of whatever index or benchmark they track – something investors have been doing for years through leveraged investment strategies like short selling and derivatives.
Managers in Europe say volumes are up because more and more investors – including institutions – are using non-delta products to manage risk. According to Danny Dolan, managing director, structured funds at RBS, big private banks have been buying monthly inverse leveraged ETFs to address spikes in market volatility, particularly in the third and fourth quarter of 2011:
“The interest was entirely driven by risk management rather than speculation about any downward moves in the market, with institutional clients who wanted to keep their existing portfolios in place using RBS’s monthly inverse leveraged ETFs as hedging tools.”
He also added that die-hard market bears and using leveraged ETFs if they expect a short-term rally.
New inflows into non-delta one products more than doubled in the U.S. last year although assets rose only slightly up to $32 billion. They still only account for three per cent of total US ETF assets.
Whether or not the force will be with Canadian institutional investors remains to be seen –derivatives are still a cheaper option for Canada’s biggest funds. But for the many small and mid-sized plans trying to deal with volatility, inverse ETFs might just offer a bit of extra force in tough markets.