Not All ETFs Are Traded Equally

August 15, 2009


Rounding out the top 20 is a set of seven ETFs aimed at producing multiples or inverse returns of the broad market or sector ETFs. Leveraged and inverse ETFs are newer products that were first issued in 2006. These investments provide a multiple of 2x or 3x the exposure to the markets, or a hedge against downturns in the markets, respectively. They are generally designed for investors interested in capitalizing on short-term market movements. With the volatility we saw in 2008, it is perhaps unsurprising that these types of products have become very popular.


Leveraged and inverse ETFs are complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.


The data show that there are significant differences in ETF trading, which can be observed by looking at the average daily turnover rates in Figure 3. On average, ETFs trade daily at a rate of 8% of their monthly assets, with close to 80% of all ETFs having a daily trading volume below 5% of assets. However, what is very noticeable is that the most heavily traded ETFs, in general, trade at a much higher turnover rate. ETFs focused on the more volatile sectors, such as financials and energy, have been traded at daily turnover rates averaging 45% and 40%, respectively. The SPDR S&P 500, the most heavily traded ETF, also traded at a high turnover rate, 43% on average. Interestingly, from January 2008 through June 2009, the SPDR S&P 500 traded within a somewhat tight turnover range of 30% to 55%, with the only exception being in the very volatile third quarter of 2008, when its average daily turnover ratio reached 64%.

The real standouts in terms of turnover, however, are the leveraged and inverse ETFs on the top 20 list. Because these are designed to return a multiple or an inverse of a market benchmark on a daily basis, their turnover rates—represented by their daily trading volumes divided by their relatively low assets under management—are staggering. The average daily turnover rates for these products have been in the range of 61% to 242%, with some inverse offerings trading at around 800% in volatile markets such as we experienced in October 2008 and February 2009. This is not to be unexpected, as sophisticated investors know that to capture the performance results they need to sell or trade every day.2 Compared with their single-beta ETF counterparts, leveraged ETFs on our top 20 list traded at an average daily turnover rate that was 1.4 to 3.0 times higher, while the inverse ETFs traded at a rate that was 2.5 to 5.4 times higher.

The growth in the number of ETF offerings has clearly coincided with an increase in the dollar volume traded, especially as a percentage of all equity trading. The figures for the overall ETF landscape are skewed by a few core ETFs, which track broad-based domestic indexes and account for the majority of the trade volume and turnover, but the dollars traded in these ETFs have not grown as fast as ETF volume overall. With the launch of short-term-focused leveraged and inverse ETFs, large or sophisticated institutional investors now have a simple way to return a multiple of a particular market or to hedge against falling markets. These products have attracted significant assets over the past few years and account for a large part of the recent rapid growth of ETF trading. There are, however, many products being used for long-term, buy-and-hold, strategic positioning.



  1. The number of ETFs includes both exchange-traded funds and exchange-traded notes.
  2. See Philips (2009) for a more in-depth discussion of leveraged and inverse ETFs.



Philips, Christopher B., and Scott J. Donaldson, 2009. Research Note: Why Leveraged ETFs Can Pack a Surprise.
Valley Forge, Pa.: Vanguard Investment Counseling & Research, The Vanguard Group.

© 2009 The Vanguard Group, Inc. All rights reserved.



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