Exchange-traded funds (or ETFs)
Leveraged ETFs have been under scrutiny by various authorities, like the Securities Exchange Commission (or SEC) and Financial Industry Regulatory Authority (or FINRA), over the last few years. The base of the arguments lies is whether leveraged ETFs are suitable for retail investors. Many industry experts, such as Blackrock (BLK) CEO Larry Fink, have expressed concerns over the products. Blackrock, the largest money manager in the world, with $4 trillion in client assets, has in fact said it won’t come up with a leveraged ETF. This series is our attempt to educate our readers about leveraged and inverse ETFs, their structure, and their suitability for retail investors. To start, we’ll cover ETF basics in this part of the series.
What are ETFs?
ETFs are an investment avenue that trades on exchanges and generally seeks to track the performance of an underlying exchange. For example, the SPDR S&P 500 (SPY) is an ETF listed on the NYSE Arca exchange that seeks to track the performance of the S&P 500 index. Top constituents of S&P 500 include Apple (AAPL), Exxon Mobil (XOM) and Microsoft (MSFT). SPY uses a market-cap weighting structure, with holdings roughly mirroring the constituents of the S&P 500. This reflects in the fact that the top ten holdings of SPY account for 17.68% of the total holdings, comparable to a cumulative weight of 19% for the top ten constituents of the S&P 500. SPY has invested in 502 companies, compared to 500 constituents of the S&P 500. This shows that the ETF closely tracks the performance of the underlying index. We will talk about the types of ETFs in the next part of the series.