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“Federal Reserve economist Tugkan Tuzun has warned leveraged exchange-traded funds could be the next problem for the stock market and could trigger a crash similar to that in 1987.  Leveraged ETFs set out to generate multiples of daily index returns by gearing their portfolios twice or three times over. Turzun points to portfolio insurance, generally blamed for triggering the 1987 crash.  Thanks to their trades, and their gearing, leveraged ETFs can have an outsized impact on the market. Tuzun argues that a 1% move in broadly-based market indices can produced rebalancing flows totaling $1 billion.”

Archived link: http://www.efinancialnews.com/story/2013-08-13/tugkan-tuzun-sees-risks-in-leveraged-etfs