The swelling controversy over the risks associated with leveraged ETFs has apparently caused its first casualty. St. Louis-based Edward Jones & Co., the prominent financial services firm, decided during a regular review of its products in June to stop selling leveraged funds, citing the fact that they are “one of the most misunderstood and potentially dangerous types of ETFs,” according to mutual fund research analyst Katie Martin. Edward Jones prepared a report titled “Not All ETFs Are Created Equal” that highlights the potential pitfalls with these complex financial instruments.
“Investors also need to recognize that leveraged ETFs have an increased potential for capital gains distributions and significantly higher expense ratios than the traditionally broadly based stock market ETFs, negating some of the benefits of purchasing an ETF,” the report said. Edward Jones’ decision to drop the product line comes as calls for regulation of leveraged ETFs are reaching a fever pitch. In recent months, a number of industry analysts (including Scott Burns of Morningstar) have called for increased oversight, joining individual investors frustrated by the returns generated by these funds over extended holding periods (due to compounding of returns and daily resets, leveraged ETFs can vary in magnitude and even direction from the amplified return on the underlying index if held for multiple trading sessions).
More recently, FINRA reminded brokers and RIAs to use caution in selling leveraged funds, ensuring that they are suitable investments for their clients. After conducting a data sweep in an attempt to quantify the issue, FINRA backpedaled a bit on its position, noting that “leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional.” And just last week, Massachusetts Secretary of State William Galvin announced that his office in
