Because we have all read bold headlines that claim significant deterioration in leveraged ETFs versus the underlying entities they are based on, many investors have become afraid to consider leveraged ETF as part of a portfolio. Most of the time those headlines are not wrong, the ETF that they talk about are faced with serious deterioration risk, but there is a reason why and it does not apply to all leveraged ETFs.
Leveraged ET apps that focus on single or limited entities like natural gas or the financial sector have limited instruments to invest in and those instruments are often ill liquid. For example, an ETF that trades natural gas can only invest in natural gas, market makers know this, they can determine when new money must be invested, and those market makers can manipulate the price of those instruments (natural gas in the example)so as to give the ETF that is forced to buy or sell the worst price possible. That worst price turns out to be the best price for the market makers during this manipulative cycle.
might be too powerful for its own good, Cramer said on Wednesday. The ETFs sudden popularity seems to be artificially driving up the commodity’s price, far beyond what the actual demand would require.
Sentiment: Strong Sell