Japan's Giant Leveraged ETF Says Won't Use Swaps as Fund Reopens

  • Fund starts taking new orders on Dec. 18 after two-month halt
  • Nomura Asset says it prioritizes transparency in running ETF

The world’s biggest leveraged exchange-traded fund says the solution to its growing pains won’t be found in the swaps market.

Using instruments such as bonds packaged with swaps would make the Next Funds Nikkei 225 Leveraged ETF less transparent, said Kazumasa Hironaka, a spokesman for Nomura Asset Management Co., which is opening the fund to new orders this week after a two-month hiatus. Nomura Asset blamed illiquidity in Japan’s futures market for the closure, after the ETF doubled in size in five months. Trading Osaka-listed contracts is the only strategy employed by the fund’s managers to deliver twice the Nikkei 225 Stock Average’s daily move.

“We will keeping watching the liquidity in the futures market to decide whether we can continue,” said Hironaka.

Individual investors had been plowing money into the Nikkei 225 ETF, spurring some investors to voice concern that the fund’s trades are increasing market volatility. Nomura Asset said in October that liquidity in the futures market wasn’t deep enough to ensure it could meet its target. Since the ban on new orders came into force on Oct. 16, the $5.9 billion ETF has seen more than $900 million in outflows, data compiled by Bloomberg show.

Leveraged funds use derivatives to pay owners some multiple of the gauges they track, usually two or three times the daily return, enabling investors to make bigger profits -- or losses -- in times of market turbulence. Because ETFs tend to place orders near the end of the trading session to mimic closing levels in their underlying indexes, some analysts have blamed them for increasing late-day market moves.

Twice Toyota

Despite its growing heft in the futures market, Nomura Asset has rejected the assertion that its trades are increasing volatility. Investors in the ETF tend to be contrarians, selling when the market rises and vice versa, Tomohisa Hanabata, a senior manager at the firm, said in an October interview.

The ETF is more popular with traders than even Toyota Motor Corp., Japan’s biggest company. Turnover for the ETF on Monday was more than twice that of the carmaker.

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