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Inverse and levered ETPs are neither effective hedging tools nor useful as buy-and-hold investments. They are effective only when used for short-term bets on the direction of an asset. They are ill understood and inherently unstable.


Overview

Levered and inverse exchange-trade products (ETPs) are designed to provide geared long and short exposures to the daily returns of various benchmark indexes. The benchmarks may be any reference index, but the popular ones are indexes of stocks, bonds, commodities, and volatility. The problem with these products is that they are not generally well understood, particularly those with futures-based benchmarks. Levered and inverse ETPs are neither suitable buy-and-hold investments nor effective hedging tools. They are unstable and exist only as mechanisms for placing short-term directional bets. Levered and inverse products are not, and cannot be, effective investment management tools.

About the Authors

Colby J. Pessina

Colby J. Pessina is an investment banking analyst at Deutsche Bank, Jacksonville, Florida.

Robert E. Whaley

Robert E. Whaley is the Valere Blair Potter Professor of Finance and director of the Financial Markets Research Center, Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee.