From individual stocks to inverse exchange-traded funds, companies have been marketing more complex strategies that can yield huge returns to individual investors.
However, recent market volatility may have increased your risk of loss.
Mike Ko, co-founder and chief strategist at Openinterest.Pro, warns that when markets decline or move sharply, these leveraged products can underperform the struggling assets they track.
“Leverage is very attractive when you’ve only noticed prices going up over the past few years,” a CNBC contributor told “ETF Edge” this week. “But having influence is a double-edged sword.”
The reason is that leverage often adds new risks. Khow points out that many lightly leveraged ETFs use tools such as total return swaps and options to provide the additional exposure they advertise. To maintain that leverage, portfolio managers must regularly adjust their positions, which becomes difficult in volatile markets.
Kau, whose firm focuses on options-focused research and analysis, said the explosion of weekly and even daily options has made the market so time-sensitive and complex that most retail investors cannot realistically manage these trades on their own.
“When you find a product that basically allows other people to handle some of it, it democratizes that product. That’s good news,” Khouw said. “The bad news is that investor education and understanding about both options and some of these products may not have kept up with the rapid development and issuance.”
Nate Geraci, president of NovaDius Wealth Management, sees two main trends behind the growth of inverse and leveraged products in the complex ETF space.
First, he sees a change in the mindset of individual investors. They pursue products that advertise much greater “astronomical” benefits, even if they don’t fully understand the risks.
“Arms race among ETF issuers”
The second trend, according to Geraci, is increased competition in the ETF market. The company rebranded from ETF Store to NovaDius Wealth Management earlier this year.
“There is essentially an arms race going on among ETF issuers,” Geraci said, adding that it also opens up the potential for “significant losses.”
