Hector McNeil, Co-CEO of Boost ETP, responds to Larry Fink’s recent criticism of leveraged exchange traded funds…
Short & Leverage ETPs (S&L ETPs) are structurally sound, serve an important role in the market for tactical traders and investors and have performed this role admirably during some of the most volatile and stressful periods in recent market history.
Boost is taking the opportunity to respond to Larry Fink’s recently reported comments because we believe they reflect a serious misunderstanding of the S&L ETP structure. These comments lack necessary distinctions between operational and regulatory practices of various S&L product types and geographic markets; they also lack a sense of scale relative to other structured products which makes hyperbolic claims of S&L ETP structural risk quantifiably untenable, and misdirected. Simply put, S&L ETP net exposure, AUM and rebalance-driven trading are insignificant in the scheme of global equity markets.
S&L ETPs have a total of USD61.5bn (as of 30 April 2014) of assets under management (AUM) globally, mostly in extremely liquid underlying asset classes such as the S&P 500 and Gold. This USD61.5bn represents less than 2% of total global ETF AUM, which itself is only about 5% of global mutual fund AUM. Perhaps more importantly, S&L ETPs are a small fraction of assets and trading volumes compared to other derivative products such as margin trading, prime brokerage, CFDs/spread bets, futures, options, structured products, certificates, warrants, swaps, shorting, stock lending and other products and services provided by the large global banking and asset management houses.
We believe S&L ETPs represent an important innovation. For certain investors these products offer a number of potential benefits, from capturing daily positive or negative returns, to cost-efficient hedging, quick market access as well as the facilitation of more sophisticated tactical trades. We welcome the evaluation of S&L ETP structure and mechanics and believe such fact-based analysis will lead to a better understanding of their unique features from which investors may benefit.