Analysis of trade outcomes for short and leveraged exchange-traded funds suggests German investors have a good understanding of the main risks and trading behaviour of the products they are buying.
ETF provider db x-trackers commissioned Germany’s Constance University of Applied Sciences to conduct a study on the use of short ETFs – also known as inverse ETFs – and leveraged ETFs in Germany, Europe’s biggest ETF market.
The results show that holding periods are relatively short for inverse and leveraged ETFs, while the amounts typically invested in leveraged products are much lower than for their non-leveraged counterparts. This conservative behaviour implies investors understand the path dependent nature of short and leveraged ETF.
“The results imply that in the majority of cases the private investors subject to the study seem to be aware of the majority of risks and opportunities connected with the use of short and leveraged ETFs,” says Leo Schubert, Professor of Business Administration at Constance University of Applied Sciences, who headed the study.
The study analysed data from Germany’s major brokerage houses. A total of 26,394 purchase and subsequent sales of short and leveraged ETFs between 1 January 2008 and 1 April 2010 were analysed. During the period, investors traded in 39 different types of short and leveraged ETFs from six ETF providers.
The results show that the majority of short and leveraged ETFs were held for a limited period of time. After 15 days, around 50 per cent of the ETFs had been sold again. After three months the figure was 85 per cent. Also, 50 per cent of trades were for less than EUR5,000. In general, far less capital is invested in ETFs with higher leverage than in non-leveraged products, while the investment volume also drops as the holding period increases. Extreme outliers in terms of outcomes were also rarely registered, with returns in 90 per cent of all analysed cases sitting between +20 per cent and -22 per cent after the ETF was sold.
“We’ve taken the criticisms of short and leveraged products seriously. This study suggests that users of the short and leveraged ETFs have a good understanding of these products and the main risks inherent to them,” says Thorsten Michalik, head of db x-trackers. “When we developed our short and leveraged products we worked with the index providers to ensure investors were presented with transparent benchmarks, making the outcomes the products provide as clear as possible. That commitment to transparency, combined with a focus on investor education, has clearly paid off.”