Vanguard gives day traders the stiff-arm by dropping inverse, leveraged strategy funds

The king of buy-and-hold investing removes rapid-fire funds that use leverage and short selling strategies

Jan 9, 2019 @ 2:02 pm

By Jeff Benjamin

The Vanguard Group, underscoring its dedication to buy-and-hold investing, is taking another step to give day traders the boot from its brokerage platform.

The $5 trillion asset management complex announced Tuesday that it is removing access to leveraged and inverse-strategy funds, both popular day-trading tools, starting Jan. 22.

"If you think about the investment philosophy long espoused by Vanguard, these products are just not aligned with that," said spokeswoman Emily Farrell. "These products are incompatible with a buy-and-hold strategy."

An example of the kinds of funds being removed from the platform is the $344 million ProShares Short VIX Short Term Futures (SVXY), which declined by more than 91% last year, but gained more than 181% in 2017.

Another example is the $25 million Direxion Daily Natural Gas Related Bull 3X (GASL), which lost almost 80% last year and was down more than 43% in 2017.

The number changes almost daily, but Vanguard estimates there are at least 400 mutual funds, exchange-traded funds and exchange-traded notes that use inverse and leveraged strategies, which can generate extreme volatility if used for long-term investing purposes.

"These kinds of strategies can be harmful to investor portfolios if used incorrectly because the trends can quickly move against you," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

The news is the latest in a series of platform and fund management changes at Vanguard, but this is one that investors might have seen coming.

Last summer, when Vanguard lifted commissions on 1,800 ETFs, which was an expansion from 77, the inverse and leveraged funds were not included.

"[Vanguard officials] had previously put up a roadblock on frequent trading of leveraged and inverse ETFs, and now they put up a permanent barrier," said Mr. Rosenbluth.

Asked about the potential for losing some trading activity, and revenue, on the brokerage platform, Ms. Farrell said, "It is certainly possible."

"This is new, but the underlying philosophy at Vanguard is certainly not new," she added.

Direxion, a fund complex made up largely of leveraged and inverse-strategy products, released a statement that reads in part, "We are aware of the long-term focus held by most Vanguard investors, but also believe the more tactical trading instruments we offer can be effective tools for well-suited investors who understand their short-term focus."

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