You’re reading the ETF IQ newsletter.
You’re reading the ETF IQ newsletter.
You’re reading the ETF IQ newsletter.
Opportunities, risks and trends – critical intelligence in the multi-trillion dollar industry.
Opportunities, risks and trends – critical intelligence in the multi-trillion dollar industry.
Opportunities, risks and trends – critical intelligence in the multi-trillion dollar industry.
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Welcome to ETF IQ, a weekly newsletter dedicated to the $20 trillion global ETF industry. I’m Bloomberg News reporter Isabelle Lee, filling in for Katie Greifeld.
Volatility Pays
I feel like I’ve been writing some version of this story for years now — and yet here we are again.
Demand for high-octane ETFs that offer to amp up the daily moves of the world’s most popular stocks and indexes shows no signs of abating. That appetite is enriching the product-pumping machines behind them.
I’m talking about leveraged exchange-traded funds, derivatives-enhanced products designed to deliver 2x the daily return of high-volatility stock favorites like Nvidia or Tesla and even 3x some indexes. While their assets are a fraction of the ETF universe, their revenue haul is wildly disproportionate.
These funds collectively generated about $1 billion in revenue last year, based on Bloomberg Intelligence’s napkin math that multiplied their assets by their fees. The milestone is revealing: it’s roughly triple what they took in in 2020 and more than double the $409 million in combined annual revenue from passively managed behemoths VOO and IVV.
As BI’s Eric Balchunas and Andre Yapp put it, leveraged ETFs have “outsized revenue efficiency.” Retail traders aren’t overly concerned about cost because these funds are typically used in small doses for short bursts — and when they work, the gains can dwarf the annualized fee.
Which is probably why Wall Street’s boldest issuers just keep pushing the envelope. A flood of proposals for products designed to deliver 4x to 5x daily returns spurred the Securities and Exchange Commission to action. In December, the regulator issued a warning, effectively blocking proposals for new 3x or more products.
But since then, a slew of paperwork has landed with the SEC from companies including Leverage Shares, GraniteShares, Direxion, ProShares and Roundhill Investments. The targets? Everything from the Nasdaq 100 and long-dated bonds to semiconductors, China equities, uranium — even Bitcoin. And that list is just from the past two months.
The concern is some issuers are benchmarking risk in ways that don’t fully capture the volatility and the bets’ propensity to snowball losses. At the center of this is the Value-at-Risk (VaR) test — a regulatory cap that limits how much a fund can theoretically lose. Dave Nadig of ETF.com says these proposals don’t stand much of a chance as “none of them can pass the 200% VaR test” required under current rules.
So why file? Issuers that Bloomberg reached out to declined to comment. Jane Edmondson of TMX VettaFi says they may simply be testing the regulatory waters — but the steady stream “does make one wonder what positive signals they might be getting from regulators.”
The math may be complex — but the business case is not. Volatility sells. Leverage magnifies it. And traders seem willing to pay up.
All Day Every Day
Here’s something new. A WisdomTree money-market fund just received SEC approval to trade tokenized shares intraday at a constant $1, effectively giving a mutual fund some ETF-like liquidity.
The approval blurs the line between wrappers and hints at where ETF market structure could go next: 24/7 trading, instant settlement and reduced counterparty risk.
Traditionally, mutual funds can only be bought or sold at their end-of-day net asset value. But this new structure uses blockchain technology to allow intraday trading and faster settlement, with a broker-dealer acting as principal.
This was only made possible through tokenization — recording ownership of traditional assets like Treasury bills on a blockchain instead of through conventional back-office systems. The assets don’t change, just the plumbing.
Noelle Acheson, author of Crypto is Macro Now newsletter, calls it a “welcome signpost on the path toward blurring the boundaries between money and securities.”
If blockchain rails can support money market funds, tokenized ETFs may eventually follow.
So why don’t tokenized ETFs exist yet? ETFs rely on complex exchange infrastructure and tightly regulated creation-redemption mechanisms deeply embedded in traditional market systems. And thorny questions remain around custody, investor protection and how to price funds when underlying markets are closed.
In other words, the technology is racing ahead of the rulebook. But Will Peck, head of digital assets at WisdomTree, confirmed that his team is currently exploring that very possibility. So is BlackRock.
IQ Test
Bloomberg’s Head of Games Joel Weber put Eric and Scarlet Fu to the test once again on BTV’s ETF IQ this past week. You can watch that here and see who won!
But before you click that, how would you fare? Answers at the end of this newsletter.
JPMorgan recently dethroned Dimensional Fund Advisors to become the world’s largest active ETF issuer by AUM. Who’s No. 3?
* Fidelity
* Capital Group
* American Century
* BlackRock
Algorhythm Holdings (ticker RIME) used to be a karaoke company. Now it’s an AI play. Which ETF has the largest portfolio weight in the stock?
* ARK Innovation ETF (ARKK)
* iShares Russell 2000 ETF (IWM)
* Vanguard Extended Market ETF (VXF)
* SPDR S&P Kensho New Economies ETF (KOMP)
Taiwan has about 15 million ETF investors. Where can you find an equal number?
* Mainland China
* Japan
* Hong Kong
* South Korea
Drill Down
In this week’s Drill Down on Bloomberg Television’s ETF IQ, Chris Davis, chairman of Davis Selected Advisors, discussed international exposure, value investing, and the growth of active ETFs.
Next Week on ETF IQ
Anna Paglia of State Street, Sylvia Jablonski of Defiance ETFs and David Sharp of Vanguard join Katie, Eric and Scarlet on Monday at noon Eastern. Watch on Bloomberg Television’s ETF IQ, on the Bloomberg Terminal at TV.
IQ Test answers: 1: Capital Group, 2: Vanguard Extended Market ETF (VXF), 3: Mainland China
Read more on Bloomberg Business
