Regulators Urge Caution on Leveraged ETFs: It's About Time

More than six months after we first cautioned that investors should 'tread carefully' with respect to leveraged ETFs, one regulatory agency has finally addressed the pitfalls with trading in these securities. In a notice issued earlier this month, the Financial Industry Regulatory Authority (FINRA) warned that:

Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.

While it's puzzling that the SEC has still said nothing about these securities even though they provide a blatant loophole around leverage restrictions, it's nice to see that at least somebody in Washington is starting to address them.

Comments

[Gary Gallo]

There are plenty of soon to be worthless stocks trading, they say nothing about them. At least with 2X or 3X they have a chance. For example FAS bought in Feb. is still worth better then a 100% gain. Buy and hold is not necessarily a sure disaster over the mid-term.

2009 Jun 24 05:42 PM

[Mark Riddix]

Good point. Leveraged ETF's are highly volatile and are useful for short term trading only. Most are rebalanced on a daily basis. They have no place in the core of a portfolio.

2009 Jun 24 06:43 PM