Tags: kass | Stock | Market | Volatility

Kass: ETFs Responsible for Stock Market Volatility

Wednesday, 12 Oct 2011 05:05 AM

By Dan Weil

The stock market’s violent moves in both directions during the last hour of trading in recent weeks have put investors on edge. And what do we have to thank for this unsettling burst of late-day volatility? Exchange-traded funds (ETFs), Doug Kass, president of hedge fund firm Seabreeze Partners Management, tells The New York Times.

Specifically it’s leveraged ETFs, which give you two or three times the daily return of a stock index – on either the short or long side of the market as you choose.

To keep the ETFs properly tied to the indices they replicate, the ETFs’ managers must make some major trades at the end of the day, often using derivatives.
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Kass has taken to calling the ETFs “weapons of mass destruction” in homage to Warren Buffett’s use of that term to describe derivatives.

“They’ve have turned the market into a casino on steroids,” Kass tells The Times. “They accentuate the moves in every direction — the upside and the downside.”

Legendary Vanguard Group founder John Bogle doesn’t think so highly of leveraged ETFs either.

“We have all these hot new products developed by this burgeoning new industry — the ETF industry, which has got to be the greatest marketing idea of this age,” Bogle tells Yahoo. But “it’s not the greatest investment idea of this age, I can assure you."

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