The Impact of Leveraged and Inverse ETFs on Underlying Stock Returns

44 Pages Posted: 1 Dec 2010 Last revised: 19 Aug 2012

See all articles by Qing Bai

Qing Bai

Dickinson College

Shaun A. Bond

UQ Business School

Brian C. Hatch

University of Cincinnati - Department of Finance - Real Estate

Date Written: August 16, 2012

Abstract

Leveraged and inverse ETFs (LETFs) were introduced in 2006 and their popularity surged starting in 2008. As of the first quarter of 2012 there were over 200 such ETFs with over $30 billion in assets under management (AUM). By late 2008 there was concern about their late-day impact on stock prices and by 2009 they were accused of causing market-wide volatility. A vocal set of market participants insist that LETF-related trading causes excess volatility and manipulates prices while others insist that the AUM is too small to impact the market. The pitch of the rhetoric reached sufficient levels to motivate a Senate Banking Committee hearing in October 2011. We examine six such LETFs and their impact on the trading of 63 real estate sector stocks. We find that late-day LETF rebalancing activity significantly moves the price of component stocks, increases their volatility, and that some of this impact is reversed in the first hour of the next day. The impact is the greatest for smaller, less actively traded, more volatile stocks. Our evidence is also consistent with predatory trading by strategic investors exploiting the predictable late-day order flow.

Keywords: Leverage and Inverse exchange traded funds (ETFs), REITs, Financial Crisis, rebalancing demand

JEL Classification: G1, G14, G17

Suggested Citation

Bai, Qing and Bond, Shaun Alexander and Hatch, Brian C., The Impact of Leveraged and Inverse ETFs on Underlying Stock Returns (August 16, 2012). 46th Annual AREUEA Conference Paper, Available at SSRN: https://ssrn.com/abstract=1716999 or http://dx.doi.org/10.2139/ssrn.1716999

Qing Bai

Dickinson College ( email )

Carlisle, PA 17013
United States

Shaun Alexander Bond

UQ Business School ( email )

The University of Queensland
Brisbane, QLD 4072
Australia

Brian C. Hatch (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner Hall
P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7076 (Phone)
513-556-0979 (Fax)

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