BlackRock CEO says leveraged ETFs could “blow up” whole industry

May 30, 2014 in News by The Manimal

Source: Reuters

BlackRock Chief Executive Officer Larry Fink said on Wednesday that leveraged exchange-traded funds contain structural problems that could “blow up” the whole industry one day.

Fink runs a company that oversees more than $4 trillion in client assets, including nearly $1 trillion in ETF assets.

“We’d never do one (a leveraged ETF),” Fink said at a Deutsche Bank investment conference in New York. “They have a structural problem that could blow up the whole industry one day.”

Fink spoke during a conversation with Deutsche Bank co-CEO Anshu Jain in a broader discussion about regulating financial companies. ProShares, a leading leveraged ETF firm, disagreed with Fink’s remarks.

“Leveraged ETFs are well regulated, transparent products and there is no credible evidence that they have any harmful effect on the markets or our industry,” said Tucker Hewes, a spokesman for ProShares.

Leveraged ETFs account for 1.2 percent of the $2.5 trillion in global ETF assets under management. At the end of April, there were nearly 270 leveraged ETF funds with $30.3 billion in assets, said Deborah Fuhr, managing partner of ETF research firm ETFGI LLP. A leveraged ETF uses financial derivatives and debt to amplify the returns of an underlying index. Some leveraged ETFs have become more aggressive, ramping up risk and potential returns, as the ETF industry gains popularity with individual and institutional investors.

Leveraged ETFs have attracted $1.8 billion in net new assets during the first four months of 2014, Fuhr said.

They are showing up more as buy-and-hold investments in the portfolios of retail investors, as financial advisers grow more comfortable recommending them, and first gained a foothold among traders who wanted an investment vehicle to make fast and enhanced bets on big index moves or the direction of gold prices, for example

Last year, when the Standard & Poor’s 500 Index rose 32 percent, the $348 million Direxion Daily S&P 500 Bull 3x Shares ETF gained 118.9 percent, or nearly quadruple the S&P 500’s gains.

Last month, Direxion Funds launched two leveraged ETFs with three times exposure to the daily direction of gold prices. Direxion Daily Gold Bull 3X Shares ETF, for example, seeks 300 percent of the daily performance of the Comex Gold Futures benchmark.

The industry’s largest leveraged ETF is the ProShares UltraShort 20+ Year Treasury, which has about $4 billion in assets.

Fink said he believes regulators should focus on the structure of financial products.

“If you want to create a safer and sounder marketplace, it has to be at the product level,” Fink said.

U.S. Securities and Exchange Commission staffers have issued warnings about leveraged ETFs, though no action has been taken to curb their availability. Regulators say individual investors may not realize that the investment products are designed to achieve their performance objectives on a daily basis rather than over the long term.