Leveraged ETF's only add to Market Efficiency
April 29, 2009
I can’t believe Jim Cramer thinks all leveraged ETF’s are good for is knocking down stocks. Well, by the same vein, they’re good for boosting stocks as well.
As the best pair trader in the world, I can only say that this futile attempt to get rid of perfectly priced market instruments only shows the lack of information in this country about leveraged products. Futures on stocks and options in particular on stocks, puts or calls, are far more useful than a leveraged ETF if you did desire to manipulate securities.
I believe you will find over time that these instruments greatly improved our liquidity and efficiency. They have their place and my place for them is in market timing. I’m not going to say that you couldn’t manipulate prices with Leveraged ETF’s on indexes, but I would also say, even if I did want to leveraged ETF’s wouldn’t be my weapon of choice. I’d be going straight to calls or puts. Leveraged ETF’s are not the fundamental cause of the market decline. These instruments only affect the speed at which markets recognize a miss-pricing. That does not mean that if someone was so inclined they should keep buying a double leveraged inverse ETF, because, at some point, I guarantee the market will move against them, no matter how much money is out there.
It’s just the fundamental basis of all securities to be perfectly priced. I can think of plenty of other instruments to use if I truly wanted to manipulate the market, and ETF’s would not be my choice. Last I checked, I could buy 100 options for a fraction of the cost, but the market maker would still hedge his position by mimicing my order. I think Jim Cramer’s crusade against leveraged ETF’s is indicative of his age. He may have thought or even manipulated a price in his day, but all these products do is price securities better.
I have never manipulated prices, and I’m not ever going to, but with Cramer speaking against leveraged ETF’s as a broad swath of the reason the market is down shows his inexperience with such instruments.
The fundamental problem with leveraged ETF’s isn’t what they do, it’s how quickly they do it, and this is not a bad thing when you think about it, especially in this age of instantaneous market assimilation of new information.
If you want to see my real trades, and not hypothetical but accurate to within 1% results on c2, have a look at: </a>
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