WSJ Says Double Leverage ETFs Are Pushing The Market

An article from the WSJ.com (subscription required) puts for the hypothesis that the 2X leveraged and inverse leveraged ETFs are pushing the market, especially in the final hour of trading.

The recent market action has traders waiting for the last hour, determining the market direction, and piling in. The leveraged ETFs are a popular vehicle to ride the direction of the final hour of the day. These ETFs have become some of the most active issues in the market.

Outside of the possibility that active trading in these funds is pushing market volatility to higher levels, I am wondering if their is a possibility of them blowing up at some point. Can they become the equivalent of program trading in 1987 or mortgage backed security trading in 2007. A few days ago I wrote an article on one of these leveraged ETFs that hit shareholders with an 86% short term capital gains distribution. That seems to be a small clue that all may not be well in double gains and losses land.

I really do not have a clue if these ETFs can blow up. The gut feeling is there that as their trading volumes grow there is a flaw in the structure that will bring it all down at some critical level. If anyone has any thoughts on this I am curious to hear them.

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