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The Securities and Exchange Commission (SEC) recently unveiled a policy change that could have a major impact on an exchange traded fund's (ETFs) risk profile. In essence, the SEC has lifted its suspension on the use of derivatives by certain ETFs. This move is in response to pressure from the industry, and it is expected to result in a major increase in the number of actively managed ETFs. Managers will now be able to use derivatives in their investment strategies in order to hedge against risk. Problem is derivatives are also widely used to speculate in order to increase profits, which most certainly increases risk. Fortunately, the SEC is keeping its freeze in place for leveraged and inverse exchange traded funds - funds that can deal a bigger blow to investors because of their use of borrowed funds to increase profits.

ETFs are investment funds that are traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index and are attractive investments because of their low costs, tax efficiency, and stock-like features. By owning an ETF, investors benefit from the diversification of an index fund as well as the ability to purchase as little as one share. In addition, expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors pay the same commission to their brokers that they would pay on any regular stock order.

Investors should be concerned with the lifting of the derivatives suspension for ETFs because it will most likely affect management's investment strategy and investors' portfolios. Currently, there are 7,149 mutual funds and 1,444 ETFs. Approximately 6,836 mutual funds are actively managed, and only 54 ETFs are actively managed thus far. With expectations of a rise in actively traded ETFs, Investors and their advisors should review their ETF holdings for any changes in investment strategy and determine whether it is suitable for them. That way, investors can avoid learning the hard way what actively traded ETFs are all about and prevent future monetary losses.

Have you suffered losses resulting from actively traded ETFs? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is actively investigating and accepting clients with valid claims against stockbrokers who misrepresented and sold unsuitable investments such as actively traded ETFs to investors.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website,, post a comment, call (800) 732-2889, or email Mr. Pearce at for answers to any of your questions about this blog post and/or any related matter.