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How Leveraged ETFs Feed The Beast
I've spoken at some length recently about the extent to which modern market structure and the many miracles of the ETF revolution have served to facilitate a kind of perpetual motion machine dynamic.
That dynamic, in turn, is behind what it's fair to describe these days as existential US market-cap dominance across the global equities sphere.
The leveraged ETF space encapsulates everything described above. "US stocks leadership concentration into 'Mag8' / 'AI' themes is being further fed by th
Daily rebalanced factor options are popular in Sweden… Behaving like (up to) 20x leveraged (potentially inverse) ETFs. They’re more widely known/marketed as bull & bear certificates.
Most of the times they go worthless on some small drawdown that when levered comes close to -100%, but they can also grow exponentially in uninterrupted runs; occasionally through survival bias you can find a few that returned several orders of magnitude (times 100%) in a few months. They are stupidly price path dependent, and if it wasn’t obvious, typically stupid to invest in since the investor can lose it all the next market day. It’s like gambling on lottery tickets, but I guess that’s why people find them alluring.
As per Kelly’s criterion I assume there’s a sweetspot leverage at which these fixed leverage instruments reach maximum AUM and market impact for certain trendy periods. In low vol high Sharpe environments they can do great, but I’ve never heard anyone getting rich from these so I assume they are really just more stupid than not.
Hypothetically some guy in Sweden could through sheer luck end up investing billions in any given popular large cap ticker, then get liquidated on the next adverse daily move. In practice I’d assume the issuers have risk limits and will terminate the instrument if individual positions get uncomfortably large. Nonetheless, the aggregate flow impact at scale would be an interesting study. Anti-stability at its finest in the name of free markets.
Mag 7 is 33% ish of S&P 500, US is 70% ish of global equities, so seven companies are a quarter of the total value of the world’s (listed) businesses?
Howard Marks has a piece on bubbles today. He points out that a P/E of 30 means the company has to keep growing for the next 40 years – or 50 depending on rates. So in 2074, NVDA has to still be the biggest semi company with the richest margins, etc.
Stocks don’t care if they are overvalued, as long as they are loved, and love doesn’t care about valuation. Right? Well, wrong. Wrong every time it’s happened before. But this one, she’s the One! Again! Four years later, you’re sadly writing the settlement check. Again. There’s no pre-nup with stocks.
I think it’s closer to 20% John as S$P 500 is “only” 5/6th or so of US market cap. Not that it matters!
I think it also means that the top three are pushing 1/8th of world market cap…
On the nose, sir. As they say in Hollywood, “Nobody knows anything.” (Add: or cares). Stocks promise nothing, have no honor, and no code. They carry only risks for us, with none for the company. Half the normal curve only goes below average.