By Terry Flanagan

Boost ETP Defends Leveraged ETFs

Boost ETP, the European short and leveraged exchange traded product provider, defended the products which Larry Fink, chief executive of BlackRock, said were a danger to the industry.

Fink said at the Deutsche Bank Global Financial Investor Conference in New York last week: “We would never do a leveraged ETF. We just think that’s just a structural problem that could blow up the whole industry one day.”

BlackRock, the largest global asset manager, owns the iShares ETF business.

Traditional exchange-traded funds track the return on an index, usually a blue-chip equity index, but have since expanded to other asset classes such as commodities and fixed income. Leveraged products use derivatives to boost their return, usually to three times the return of the underlying asset, but can also increase losses.

Hector McNeil, co-chief executive of Boost ETP, told Markets Media that leveraged ETFs play an important role in the market by providing investors with a liquid hedging tool, which they could not easily obtain in any other form.

McNeil argued: “Investors in short and leveraged ETFs cannot lose more than their original investment. It is also important to note that they are traded on an exchange, not over-the-counter, and that the leverage amounts are low – a maximum of three times.”

He said short and leveraged ETFs have total assets of about $60bn, less than 2% of the total ETF market and less than 5% of the total assets in mutual funds.

“Most short and leveraged ETFs have extraordinary liquid underlings such as the FTSE 100 or S&P 500,” McNeil added. “Less than 1% of activity is is more esoteric instruments.”

McNeil also said that issuers had been educating investors about the proper uses of short and leveraged ETFs and Boost ETP allows investors to simulate trading on their website before carrying out real trades.

Direxion Investments , a US ETF issuer, said in a statement that it “completely rejects” Fink’s contention that leveraged ETFs pose a systemic risk.

Direxion argued that total assets in leveraged ETFs overstate market exposure as they include both long and short products.

At the close of business on May 28 gross assets in Direxion and ProShares leveraged equity ETF products were $21.9bn across 140 ETFs according to the statement, giving an exposure of $49.5bn including leverage. However total long exposure was $30.9bn and total short exposure was $18.6bn, reducing total net exposure to $12.4bn.

The statement said leveraged ETFs are also rebalanced on a daily basis to maintain the same ratio of capital to exposure each day and have to respond to losses by reducing exposure.

Direxion said: “It is hard to understand how Fink could conclude that a relatively small, highly liquid, completely transparent suite of products, which systematically reduce risk in response to losses, could generate systemic risk.”

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