FYI: Leveraged and inverse exchange-traded funds (ETFs) have been heavily criticized forexacerbating volatility in financial markets because it is thought that they mechanicallyrebalance their portfolios in the same direction as contemporaneous returns. We arguethat these criticisms are likely exaggerated because they ignore the effects of capitalflows on ETF rebalancing demand. Empirically, we find that capital flows substantiallyreduce the need for ETFs to rebalance when returns are large in magnitude and,therefore, mitigate the potential for these products to amplify volatility. We also showtheoretically that flows can completely eliminate ETF rebalancing in the limit.
Regards,
Ted
http://www.ritholtz.com/blog/2015/01/fed-are-concerns-about-leveraged-etfs-overblown/print/
