A reminder on the extra market downside risk created by ETFs


As a reminder in markets selling off in recent days, please find a report which touches on the extra volatility created by ETFs on the downside that amplifies market sell offs.

An excerpt of the report is as follows;

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index…The point Mr Fink is driving at is…the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.

Australia vs Japan – Coca Cola Index


Whenever buying a Coke in Australia it is hard not to notice the exorbitant prices for a 500ml bottle – usually around $4. Here in parts of Japan you can pick up a 500ml Coke for less than $1. In convenience stores 500ml Coke sells for ¥129 or around $1.50. Either way Japan is a bargain basement country which is often contrary to expectations.