Leveraged ETFs: An Endangered Species? – ProShares UltraShort 20+ Year Trea (ETF) (TBT), ProShares UltraShort S&P500 (ETF) (SDS)

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Exchange-traded funds have made investing a lot simpler for millions of investors. But ETFs have also introduced a wide variety of previously unavailable assets to the mainstream investing world. One of the most dangerous and misunderstood sets of funds has been the leveraged ETF space, where traders seek to make big bets on fast-paced moves in a particular market.

Despite their high risk, leveraged ETFs have shown no sign of disappearing. But with a recent move by one of the pioneers of the industry to close its final two leveraged ETFs, the big question is what’s behind the decision to abandon the space. Could leveraged ETFs finally be losing their appeal? Let’s take a closer look.

Leveraged ETF

Guggenheim gives up on leveraged ETFs
Recently, ETF provider Guggenheim Investments decided to close nine of its ETFs. Although most of the funds affected were based on specialized sectors or market cap, two of the funds were leveraged ETFs tracking the S&P 500. There’s nothing all that surprising about the news in itself. Both of the ETFs had assets well below the $100 million mark, which is widely seen as the amount necessary for an ETF to survive for the long term.

But Guggenheim’s decision is remarkable because of its history. As a recent article in ETF Daily News noted, Guggenheim acquired the ETFs when it bought out Rydex, which was the first company to offer a leveraged mutual fund two decades ago.

Who’s left?
With Guggenheim’s departure, the remaining big players in the leveraged ETF space are ProShares and Direxion. But unlike Guggenheim, both Direxion and ProShares show every sign of staying in the leveraged-ETF space for a long time.

ProShares in particular has a healthy slate of funds. Look at a list of leveraged ETFs by assets under management, and you’ll find that most of the entries come from ProShares. In large part, the success of ProShares owes to its ability to offer ways to play popular trends, as its biggest funds show.

For years, investors have been looking for bond yields to start rising. ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) promises high returns when that happens, and the fund has more than $3.3 billion in cash, along with a variety of derivative positions designed to provide returns equal to double the inverse daily return of an index of long-term bonds.

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