Preliminary Fed Report Says Don't Fear Leveraged ETFs

Leveraged and inverse ETFs, which have come under heavy criticism as potentially exacerbating volatility in financial markets, are not the danger that critics have made them out to be, concludes a preliminary study from U.S. Federal Reserve researchers.

In their white paper, “Are Concerns About Leveraged ETFs Overblown,” Fed researchers Ivan T. Ivanov and Stephen L. Lenkey make the case that concerns in this regard are exaggerated.  To the contrary, the author’s assert that “capital flows considerably reduce ETF rebalancing demand and, therefore, mitigate the potential for ETFs to amplify volatility.”

Opposition to the leveraged ETFs

Initial opposition to the leveraged ETFs was strong. In fact, as...