With more than $1 trillion invested in exchange-traded funds, the stakes for the companies that manage those assets are monumental. So with a Congressional committee hearing serving as a convenient opening, the giant in the ETF industry has taken the opportunity to try to squash what's become an increasingly popular competitor.
Leveraged ETFs inspire intense debate among ordinary investors. While some see them as a great way to take maximum advantage of short-term trends in the market, others note the potential for big losses if ETF shareholders don't use them correctly. Later in the article, we'll take a look at whether investors are using leveraged ETFs in the manner they were intended. But first, let's go ringside to see two of the industry's biggest players in their ongoing fight about ETFs.
Let the battle royale begin
In one corner, you'll find Larry Fink, CEO of BlackRock
Fighting against iShares are leveraged ETF providers like Direxion and ProShares, both of which have large and popular leveraged ETFs. ProShare Advisors CEO Michael Sapir called the BlackRock proposal "anticompetitive" as a backhanded way to attack iShares competitors without iShares having to make any changes itself. Further, leveraged ETF managers would prefer to continue attempting to educate investors about the characteristics of the funds, viewing that as being more beneficial than eliminating or limiting their use arbitrarily.
Let the bell ring
So which side has it right? One key issue to address is whether investors are actually using leveraged ETFs the way they were intended: as very short-term investment vehicles for playing discrete trends in the markets.
For a clue to that, you can look at investor turnover of leveraged ETFs. If shareholders are buying and selling their ETF shares on a daily basis, as their calculation methods would suggest is the most appropriate strategy, then you'd expect to see average daily dollar trading volume to approach the total assets under management of the ETF. On the other hand, if volumes are considerably less, then it suggests that investors are holding on to their shares much longer.
As you'd expect, different ETFs get used for different purposes. With silver ETFs ProShares Ultra Silver
Interestingly, though, some bullish funds had slower turnover rates. In particular, financial-focused Direxion Daily Financial Bull 3x
It's a draw
In the end, whether you think leveraged ETFs should have to ditch the exchange-traded fund moniker depends on your opinion of how much investors need protection from regulators. The companies that sell leveraged ETFs have been as clear as they possibly can be about how these ETFs work. At some point, it's up to you to make an informed, rational decision about whether leveraged ETFs deserve a place in your portfolio.
What's certain, though, is that a simple name-change won't have any material impact. If regulators really don't like leveraged ETFs, they shouldn't seek out an unsatisfying compromise. Rather, they should outlaw leveraged ETFs entirely and let the chips fall where they may.
ETF investors don't need leverage to earn strong returns. Take a look at The Motley Fool's free special report on ETFs and get some names you can truly count on.Fool contributor Dan Caplinger fondly remembers watching pro wrestling as a kid. You can follow him on Twitter here. He doesn't own shares of the funds mentioned in this article. The Motley Fool has sold short shares of SPDR S&P 500. Motley Fool newsletter services have recommended buying shares of BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy stands up to bullies.