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Leveraged ETFs Were $17 Billion Flow Kicker To MAGA Rally
So, yeah: Modern markets did their thing in the monster, mid-week MAGA melt-up.
The post-election frenzy on Wall Street tipped all the usual upside dominoes, a chain reaction which crescendoed into a massive end-of-day rebalancing flow from the increasingly impactful leveraged ETF space.
This is a source of intense reader interest, and for a very good reason. Have a look the figures below from Nomura's Charlie McElligott (click to enlarge as always).
On the right, you can see what I mean by
It’s nice to see that high quality longer-term investors are piling in!
H, since I’m way out of my depth in understanding how these leveraged ETFs work. I’d love an explainer article on how these funds lever themselves and the risks involved. The big brain version of myself looks at these and thinks why not invest a chunk of my long-term investments in a leveraged ETF since the market always goes up eventually? Also, who is taking the other side of this leverage? If the market generally goes up and these leveraged ETFs going up by a multiple, wouldn’t someone be on the losing end? I’m guessing the answer to that will be why these ETFs are ultimately a bad idea, but would be helpful to get a better understanding of how these work.
Warning: My knowlege is dated, as am I. But I recall that the issue is that the issuers are essentially selling you a call. And like any option seller, they need to keep their deltas hedged, in their cases on a daily basis.
It can get messy for the issuer AND the buyer. Perhaps 15 years ago or so there were some damning exposes about the products in major reputible financial publications such as the WSJ. I vivdly recall one which featured some examples of investors making the right call on a market but LOSING money even as the asset price rose thanks to this arcane and difficult to understand daily “square up” mechanism.
Not offering advice here, but unless things have changed, these levered ETFs seem to most suitable to very short term time horizons. A hedge fund manager I once worked with used them a lot but his holding period rarely exceeded a week. If your time horizon is longer term, maybe it would make more sense to just use margin to lever up your holdings.
Again, someone might refresh my sparse knowledge of these.