(Adds comment from leveraged ETF firm ProShares in paragraphs
By Tim McLaughlin
May 28 BlackRock Inc Chief Executive
Officer Larry Fink said on Wednesday that leveraged
exchange-traded funds contain structural problems that could
"blow up" the whole industry one day.
Fink runs a company that oversees more than $4 trillion in
client assets, including nearly $1 trillion in ETF assets.
"We'd never do one (a leveraged ETF)," Fink said at a
Deutsche Bank investment conference in New York. "They have a
structural problem that could blow up the whole industry one
Fink spoke during a conversation with Deutsche Bank co-CEO
Anshu Jain in a broader discussion about regulating financial
companies. ProShares, a leading leveraged ETF firm, disagreed
with Fink's remarks.
"Leveraged ETFs are well regulated, transparent products and
there is no credible evidence that they have any harmful effect
on the markets or our industry," said Tucker Hewes, a spokesman
Leveraged ETFs account for 1.2 percent of the $2.5 trillion
in global ETF assets under management. At the end of April,
there were nearly 270 leveraged ETF funds with $30.3 billion in
assets, said Deborah Fuhr, managing partner of ETF research firm
A leveraged ETF uses financial derivatives and debt to
amplify the returns of an underlying index. Some leveraged ETFs
have become more aggressive, ramping up risk and potential
returns, as the ETF industry gains popularity with individual
and institutional investors.
Leveraged ETFs have attracted $1.8 billion in net new assets
during the first four months of 2014, Fuhr said.
They are showing up more as buy-and-hold investments in the
portfolios of retail investors, as financial advisers grow more
comfortable recommending them, and first gained a foothold among
traders who wanted an investment vehicle to make fast and
enhanced bets on big index moves or the direction of gold
prices, for example
Last year, when the Standard & Poor's 500 Index rose 32
percent, the $348 million Direxion Daily S&P 500 Bull 3x Shares
ETF gained 118.9 percent, or nearly quadruple the S&P
Last month, Direxion Funds launched two leveraged ETFs with
three times exposure to the daily direction of gold prices.
Direxion Daily Gold Bull 3X Shares ETF, for example,
seeks 300 percent of the daily performance of the Comex Gold
The industry's largest leveraged ETF is the ProShares
UltraShort 20+ Year Treasury, which has about $4 billion
Fink said he believes regulators should focus on the
structure of financial products.
"If you want to create a safer and sounder marketplace, it
has to be at the product level," Fink said.
U.S. Securities and Exchange Commission staffers have
issued warnings about leveraged ETFs, though no action has been
taken to curb their availability. Regulators say individual
investors may not realize that the investment products are
designed to achieve their performance objectives on a daily
basis rather than over the long term.
(Reporting By Tim McLaughlin; Editing by David Gregorio and Tom