Leveraged and inverse funds currently oversee about $36 billion, according to data compiled by Bloomberg -- less than 1% of the overall market. Assets in the ProShares and Direxion funds have been relatively static in recent years. And BlackRock Inc., the world’s largest ETF issuer, has argued that leveraged funds should not even be described as ETFs, given their complexity.
“The most sought after exposures in these wrappers have already been covered,” said Ben Johnson, head of passive-strategy research for Morningstar Inc. “Anything new that is coming in at the margins will likely aim for something more esoteric, more gimmicky.”
SEC Split
But for investors who are excited by the prospect of more leveraged funds, there’s still a long way to go before the floodgates open.
The proposal is part of a broader initiative to impose more general restrictions on the use of derivatives for ETFs, mutual funds and business development companies, and could be amended after the SEC takes 60 days of public comment.
Commissioner Robert Jackson Jr. has been outspoken in the past about the dangers of these products and released a statement last week with another official urging commentators to weigh in on whether the contemplated sales restrictions are sufficient. Meanwhile, two other commissioners expressed reservations about the plan and published a letter seeking feedback on any unintended consequences.
“Any time you’re dealing with something novel, it’s more challenging to figure out how to comply with it and to determine whether or not it allows for workable sales of the products,” said Jeremy Senderowicz, a partner at law firm Dechert. “I would expect there to be some real push back from people in the industry about the restrictions.”
This article was provided by Bloomberg News.