Boom in Japan leveraged ETFs exposes market risk
With turnover now more than 400 times at its launch, the Nomura Nikkei leveraged ETF is posing a tricky problem for the fund’s manager
Japan’s main exchange-traded fund, the world’s largest, has become so popular with an investment mandate to double returns that it is distorting the Tokyo futures market and exposing stocks to unexpectedly large price swings.
With turnover now more than 400 times at its launch, the Nomura Nikkei leveraged ETF is posing a tricky problem for the fund’s manager, Nomura Asset Management.
Japanese day traders and professional players such as high-frequency traders have been lured by the fund’s aims to double the Nikkei stock index’s moves in either direction.
The rapid growth has meant a huge number of futures must be bought or sold to deliver the fund’s mandate – an amount so high that it has at times begun to distort the futures market and shake up the Nikkei.
Nomura’s efforts to smoothen the wild swings by stopping the creation of new shares in its existing funds have led to more distortions.
“The simplicity of the ETF is blinding people to think they are safe. (In reality), the complexity of ETFs is misunderstood by investors,” said Michael Newman, the president of Analogica KK.