Aniket Ullal, SVP and Head, ETF Research & Analytics at CFRA, has published a research note revealing that US ETFs are rapidly increasing in complexity.
Entitled From Bogleheads to Gearheads, Ullal notes that over 40 per cent of the ETFs listed in the US in 2024 used derivatives as a key component of their strategy, up from 20 per cent in 2014.
Leveraged and inverse products now make up a third of all derivatives-based equity ETFs by number, with the count of single stock leveraged products increasing. Assets tend to pool around the products with the highest leverage ratios. ETFs with leverage ratios of 3x or higher account for 58 per cent of assets in leveraged and inverse ETFs in the US, he writes.
Fundamental context
Jack Bogle, the pioneering founder of Vanguard, often railed against the ETF as an investment vehicle, Ullal writes. His primary concern was that ETFs would encourage excessive trading by retail investors, resulting in unnecessary turnover and trading fees.
“Despite his concerns, the ETF structure has generated substantial value for investors, by driving down expense ratios, increasing tax efficiency, and encouraging transparency of holdings. ETFs have also democratised access to strategies and asset classes that were earlier accessible primarily to institutional investors and high-net-worth individuals.,” Ullal writes.
“Nevertheless, as we start 2025, it is worthwhile to pause and reflect on the rapidly rising complexity of the ETF industry. In 2024, 40 per cent of the new ETFs listed in the US used derivatives as a significant component of their investment strategy, up from 20 per cent in 2014. This is not inherently a negative development – products like buffer ETFs use derivatives to provide structured outcomes to investors, which help to manage risk. In aggregate, however, the new ETFs being listed are quite far removed from the industry’s traditional roots in low-cost replication of broad indices,” Ullal says.
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