Speaking at a Deutsche Bank conference earlier this week, Larry Fink, chief executive and chairman of BlackRock, the parent of iShares, argued that leveraged exchange-traded products represent “a structural problem that could blow up the whole industry one day”.
Larry Fink, Chairman and CEO of BlackRock.
Fink also asserted that iShares, the world’s largest provider of exchange-traded funds, “would never do a leveraged ETF”.
It is not the first time that Fink has bashed leveraged ETPs. In November 2011, Fink said he was surprised that they had even received regulatory approval and posited that they could become the next mortgage-backed securities calamity if not properly managed.
His views, however, have not gone down well with all ETP industry participants, least of all with the providers of such products, which include major companies such as ProShares, Direxion and Boost ETP, a subsidiary of WisdomTree.
A statement from Direxion said, “Direxion Investments completely rejects his [Larry Fink’s] contention that leveraged ETFs pose a systemic risk”, adding “it is hard to understand how Mr 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.”
Hector McNeil, Co-CEO of Boost ETP, said, “Short and leverage 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.”
He added that the comments “reflect a serious misunderstanding of the short & leverage ETP structure” and “lack necessary distinctions between operational and regulatory practices of various short and leverage product types and geographic markets; they also lack a sense of scale relative to other structured products which makes hyperbolic claims of short and leverage ETP structural risk quantifiably untenable, and misdirected.”
Among the statistics McNeil cites are that short and leverage ETPs have a total of $61.5 billion (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 $61.5 billion represents less than 2% of total global ETF AUM, which itself is only about 5% of global mutual fund AUM.
Perhaps more importantly, McNeil notes that short and leverage 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.
According to McNeil, Fink’s comments also ignore the potential benefits offered by short and leveraged ETPs, “from capturing daily positive or negative returns, to cost-efficient hedging, quick market access as well as the facilitation of more sophisticated tactical trades.”