The numbers seem to back him up. Assets held in inverse funds have fallen off for three years running. Morningstar has them at $16.2 billion, through the end of September. That compares to $18.3 billion at the end of 2009.
Assets held in leveraged funds are up slightly, from $11.1 billion at the end of 2010, to $11.4 billion at the end of September.
But, if you peel away the layers, only one category tracked by Morningstar is up this year: Leveraged commodities, at 40.9%.
Down 38.4% are leveraged debt funds. Down 34.3% are inverse commodity funds. Flat are inverse debt funds and leveraged equity funds. Down 8.2% are inverse equity funds.
The catalyst: Disillusionment. "When they first came out, a lot of individual investors really didn't understand the way they worked,'' Rawson said. With leveraged funds, for instance, "they assumed that you would get one positive, two or three or negative one, two or three times the long-term performance of the underlying assets."
And why not? The assumption seemed logical. Because the ideas seemed so elegantly simple. If you thought markets were going to fall, you'd want to bet against a given benchmark or collection of stocks. Hence, the inverse fund, traded on an exchange.
If you thought you knew which way stocks were headed, you'd want not just an average couch-potato return. You'd want to double or triple your return. Hence, the leveraged ETF.
But these proved to be funds that you didn't hold for the long-term. Because the calculations of their returns weren't made when you bought and sold them. They were made every day.
"There was a kind of disillusionment when people found out that, no, we're talking about a daily compounding and a daily multiple of the daily return of the underlying indexes,'' Rawson said.
This became brutally apparent in commodity and equity products, in the wake of the credit crisis of late 2008 and early 2009. And, three years later, the funds have yet to prove their staying power, he said.
"You've seen so many investors get burned over time," he said, "that a lot of people are staying away from these funds."
Take the idea of bull and bear funds. Surely, if a bull fund promising three times the general market return falls in value over time, then the matching bear fund must go up. Take your pick.
Right? Wrong. Since early 2009, the value of shares in the Direxion Daily Financial Bull 3X Shares ETF (FAS) are down 79%, by Morningstar's count. Not so long ago at $256, they're now down to $102.23.
Since the same starting point, the value of shares in the Direxion Daily Financial Bear 3X Shares ETF (FAZ) are down 99%. Shares in that fund traded at $7,262.50 in November 2008. Last week, they were at $18.16 each.
"You can't get much worse than that," Rawson said.
But inverse and leveraged funds don't move in lockstep with underlying benchmarks, since they compound daily and are used to capture very short-term movements of underlying indexes. "Some times they can underperform their benchmarks,'' said Paul Brigandi, senior vice president of portfolio management at Direxion Funds. "Some times that looks out of whack."
That makes investors "realize these are money-losing propositions over the long-term,'' Rawson said.
In early August, Direxion decided to liquidate and shutter nine exchange-traded funds, ranging from the Direxion Daily Agribusiness Bull 3X Shares (COWL) and Direxion Daily Agribusiness Bear 3X Shares (COWS) to the Direxion Daily Retail Bear 3X Shares (RETS). "We have a lot of funds. Some funds just didn't gain the interest and traction we thought they would,'' Brigandi said.
Three years ago, the Financial Industry Regulatory Authority warned investors that "due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective.''