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Morningstar: Leveraged ETFs Haven’t Caused Increased Market Volatility

A recent opinion piece by a Morningstar ETF analyst argues that leveraged ETFs are not the cause of the increased market volatility we've seen over the past few years.  The article acknowledges that the number of leveraged and inverse ETFs has increased during this time period and that they are much more volatile than the underlying indexes they seek to track.  However, the author argues that since leveraged and inverse ETFs are only a small segment of the market (just 3.2% of all US ETF assets), "it is hard to imagine that [they] could impact market volatility."  In addition, he states that the fact that leveraged and inverse ETFs have maintained stable assets since 2009 is evidence that they aren't amplifying market volatility (if they were, the author posits that their assets should ebb and flow).  Finally, he refutes the notion that the pro-cyclical trading of leveraged ETFs cause market volatility.  If they did, he says that "we should be able to predict the direction of the market in the final minutes of trading based on how the market has moved earlier in the day."