Being big isn’t everything in the $4 trillion market for exchange-traded products. Smaller managers are ruling the roost this year.
Eight of the 10 best-returning ETPs in 2019 have less than $100 million in assets, and none of them is run by a mega-manager like Vanguard Group or BlackRock Inc., according to data compiled by Bloomberg. But those aren’t the only things they have in common: All also use leverage to juice their returns.
Successful minnows include funds that focus on 2019’s obvious outperformers like homebuilders and industrials, alongside some less talked-about winners, such as Russian stocks. These niche products — run by the likes of Direxion Investments and ProShares Advisors — have an enthusiastic following among traders who use leveraged ETPs to make short-term bets.
Many of these products “tend to be not particularly massive in assets under management because they cater to a specific audience, someone willing to assume much more aggressive trading dynamics,” said Ryan Giannotto, director of research at GraniteShares Inc. “A lot of these ideas are used to tap into specific strategies.”
The Direxion Daily Russia Bull 3x Shares, which looks to deliver 300% of the daily returns of the Market Vectors Russia Index, has surged close to 80% this year. Two traditional ETFs tracking Russian stocks have also gained: the iShares MSCI Russia Capped ETF, or ERUS, and the VanEck Vectors Russia ETF, which trades under RSX, have each risen more than 25% in 2019.
Some of that advance is due to the nation’s strong economic fundamentals despite the imposition of U.S. sanctions, according to Chris Gaffney, president of world markets at TIAA Bank. “If we see sanctions ease back at all, you can see that Russian economy really do well,” he said in an interview at Bloomberg’s New York headquarters.
But even as leveraged funds lead the pack, some large institutional players have pushed back against the use of non-traditional ETF strategies due to the risks involved with trading them. Since they’re designed to deliver multiples of the underlying securities and indexes’ performance, they can lose value quickly during market fluctuations.
Credit Suisse Group AG, for instance, shuttered an exchange-traded note last year after the product lost 90% of its value following a volatility spike. Vanguard subsequently banned clients from making new trades of leveraged and inverse investments on its brokerage platform.
“The issue is, are they attracting people over there who don’t know what they’re doing?” said Bloomberg Intelligence analyst Eric Balchunas. “XIV showed, yeah, there’s probably some cases of that.”
Invesco Ltd.’s solar fund, ticker TAN, is leading gains among unleveraged funds, returning almost 50% since Dec. 31, while the Renaissance IPO ETF added more than 30%.
Yet “timing is everything with these,” said Balchunas. “I wouldn’t be surprised if TAN finishes negative this year.”