There’s been much ado about the power of leveraged ETFs to move markets. Back in October, New York Times writer Andrew Ross Sorkin pushed the argument forward by interviewing hedge fund manager Douglas Kass as he complained that end of day rebalancing on the part of ETFs was sending markets into spasms of volatility.
Credit Suisse recently issued a report to refute the link between volatility and end of day trading and last week Financial Times reporter Chris Flood interviewed Credit Suisse’s Ana Avramovic about the research. She says criticisms of leveraged ETFs are based on lack of understanding about how the products work.
The report plays this out through data that shows rebalancing by leveraged ETFs happening in the same direction as the underlying index is moving at the end of the day. This is because leveraged ETFs must provide a multiple of the daily returns of an index every day – when the market rises, ETFs must buy more, when the market falls, they need to sell more.
But where Credit Suisse sees the most compelling evidence is in the basic daily movements of the S&P 500. If the index is rising (or falling) in the early part of a trading session, it maintains the same upward momentum in the last hour of trading on 50% of trading days – the market is also equally likely to reverse direction in the final hour of trading.
If leveraged ETFs were driving markets then the price trend should always continue to the close Avamovic argues.
There’s also no link between the trading of leveraged ETFs and big changes in volume – trading for US equities are mainly skewed towards the end of the day says the report while ETF volumes are higher at the opening then at the end.