Investors are increasingly drawn to complex investment strategies, from individual stocks to inverse exchange-traded funds, which promise substantial returns. Yet, in today’s fluctuating market, the risk of loss seems to be on the rise.
Mike Ko, the co-founder and chief strategist at Openinterest.Pro, warns that during downturns or sharp market shifts, these leveraged products might not perform as well as the underlying assets they’re meant to track.
“Leverage can seem appealing when everything’s going up,” a CNBC contributor mentioned on “ETF Edge” recently. “But it’s a double-edged sword.”
One major concern is that leverage introduces additional risks. Ko highlights that lightly leveraged ETFs often utilize tools like total return swaps and options to achieve their promised exposure. To sustain this leverage, portfolio managers need to frequently adjust their positions, which can be quite challenging in volatile conditions.
Ko, whose firm specializes in option-based research, also points out that the surge in weekly and even daily options has made the market quite time-sensitive and complicated. This can leave many retail investors struggling to handle such trades on their own.
“When you find a product that allows others to manage some of it, it makes it more accessible. That’s a positive,” Ko added. “But unfortunately, investor education and awareness about options and these products haven’t quite kept pace with the rapid changes.”
Nate Geraci, president of NovaDius Wealth Management, identifies two key factors contributing to the rise of inverse and leveraged products in this complex ETF environment.
He notes a shift in individual investors’ attitudes, who now tend to chase products that boast extraordinary returns, often without a clear grasp of the risks involved.
“Arms race among ETF issuers”
Another trend Geraci sees is escalating competition among ETF providers. His firm transitioned from ETF Store to NovaDius Wealth Management earlier this year.
“There’s definitely an arms race happening between ETF issuers,” Geraci remarked, cautioning that this could lead to “significant losses.”
