Leveraged and Inverse ETF Providers Now Face Lawsuits: When Will It End?

Includes: FAZ, SRS
by: Tom Lydon

Leveraged and inverse ETFs continue to be the subject of scrutiny. When will it end?

This summer, both FINRA and the SEC weighed in with their thoughts on these controversial funds and ultimately declared that investors should seek the advice of an investment professional who understands how these funds work. The agencies also took care to note that the ETFs need to be more closely monitored than their plain-vanilla brethren. (Read their statement here).

That’s the end of it, right? Not so fast.

Since then, ProShares was hit with a lawsuit regarding the UltraShort Real Estate ETF (NYSEArca: SRS), while Direxion was hit with a suit that focuses on the performance of the Financial Bear 3X Shares (NYSEArca: FAZ).

There are two issues at play in these suits:

1. Did the providers give proper disclosure about these funds? Yes, they did. Leveraged and inverse ETF providers have taken care to ensure that investors don’t buy these funds without understanding how they operate. This, coupled with the SEC and FINRA warnings, should do much to mitigate any confusion or misunderstanding.

2. The investors filing these suits were “surprised” by how their funds performed. There has been no shortage of education on these funds. Anyone who has done their due diligence would have found a number of sources to use when evaluating them and enough information to determine whether they were worth the risks they entail.

ETF Database put together a good article explaining the issue of compounding. While compounding can work against investors in highly volatile markets, it can work an investor’s favor at other times. Read on to see how.