Recent market volatility has been good for ProShare Advisors LLC.
The gyrations have drawn attention to its 52 exchange traded funds, all of which use leverage to provide short or magnified exposure to various indexes.
Recent market volatility has been good for ProShare Advisors LLC.
The gyrations have drawn attention to its 52 exchange traded funds, all of which use leverage to provide short or magnified exposure to various indexes.
One ETF that has been particularly popular is the UltraShort QQQ ProShares ETF. At the end of last month, it had an average daily volume of 2.42 million, making it one of the most-traded vehicles on the American Stock Exchange in New York.
And ProShare saw more than 150 million shares of it ETFs trade on Aug. 15, said Michael Sapir, chief executive of ProShare and its sister company, ProFund Advisors LLC, both of Bethesda, Md.
That caused a stir among industry watchers.
“It’s an impressive number,” said Herb Blank, president of QED International Inc. of New York, an industry consultant.
It isn’t surprising, however, he said.
During times of volatility, ProShare’s ETFs — specifically those that short stocks — are expected to be popular, Mr. Blank said.
Investors can use ProShare ETFs as a way to hedge against market declines or to take advantage of the declines, he said.
ProShare has pulled in more than $7 billion after launching its ETFs a little more than a year ago.
The company hopes to capitalize on its success by launching even more ETFs that use leverage to provide short or magnified exposure to different indexes.
Of particular note are international and fixed-income ETFs that are on the drawing board.
International PowerShare ETFs in registration include the UltraShort FTSE/Xinhua China 25 ProShares ETF, UltraShort MSCI EAFE ProShares ETF, UltraShort MSCI Emerging Markets ProShares ETF and UltraShort MSCI Japan ProShares ETF.
Rydex weighs in
Fixed-income ETFs include the UltraShort iBoxx $ Liquid High Yield ProShares ETF, UltraShort Lehman Brothers 7-10 Year U.S. Treasury ProShares ETF and UltraShort Lehman Brothers 20+ Year U.S. Treasury ProShares ETF.
At least one other company — Rydex Investments of Rockville, Md. — has 90 ETFs in registration that would provide short and magnified exposure to indexes.
Because the ETFs are in registration, a Rydex spokeswoman declined to discuss them.
Financial advisers, however, said that ETFs that provide short or magnified exposure to an index should be approached with caution.
“We view these as timing mechanisms,” said Mark Balasa, co-president of Balasa Dinverno & Foltz LLC in Itasca, Ill., explaining why his firm doesn’t recommend them to clients.
But he stopped short of condemning the products.
For hedge funds or other professional traders that try to take short-term strategic bets, “this would be another tool for them,” Mr. Balasa said.
Unfortunately, because ETFs are sold like stocks, it is hard to tell who is buying them, Mr. Sapir said.
But anecdotal evidence suggests that the funds appeal to a wide range of investors, he said.
“I think these are being used as tools … from everyone from hedge funds to Wall Street traders to financial professionals to sophisticated individuals,” Mr. Sapir said.
But average retail investors could get hurt trading such ETFs, said Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla.
And based on the volume at which ProShare’s ETFs are trading, it would appear that “hot money” is coming in to the ETFs from somewhere, he said.
But that doesn’t mean that ETFs using leverage to provide short or magnified exposure to an index should be completely avoided, Mr. Evensky said.
In the right hands, they can be quite useful, he said.
The only reason Mr. Evensky hasn’t used such ETFs is because he hasn’t yet gotten “comfortable” with integrating them into his clients’ portfolios.
Eventually, he could use such ETFs as a “hedging tool,” he said.
David Hoffman can be reached at dhoffman@crain.com.
