September 10, 2009 at 12:00 pm by Tom Lydon
Leveraged and inverse exchange traded funds (ETFs) have been receiving more than their fair share of negative press these days, but the fracas has some advisors scratching their heads.
Since the leveraged and inverse ETFs have come under scrutiny because of market volatility and commodity price fluctuations, advisors are baffled about the fuss. While not all retail investors and advisors understand the products, advisors say that it’s no fault of the industry’s. In fact, the industry has taken large steps in an effort to figure out what went wrong with these ETFs, explains Dan Jamieson for Investment News.
The Financial Industry Regulatory Authority (FINRA) sparked concern about leveraged and inverse ETFs in June when it issued a warning about using the products for any period of time more than one day.
Experts say because of the daily resetting by the products and the effects of compounding, the sequence of returns is critical. Because of all volatility the markets have seen, however, if you did buy and hold for an extended period, the leveraged products didn’t always correlate to the underlying index, causing the confusion. ETF providers have always explained how the daily resets work. Direxion is one provider that is planning to roll out some products that reset monthly.
Leveraged funds often end up on the top of performance lists and get a lot of attention. The investors who got greedy and jumped in without doing any homework are likely the ones who got burned. In addition, although advisors may understand how to use the products, that doesn’t always mean they’ll be on the right side of the market.
Making a wrong-way bet on market direction, or giving up profits with a hedge, doesn’t always endear advisors to their clients. As regulators are trying to get their arms around the industry a bit more, the warning has been made and the heat should come down a little.
ETFs are not the worst things that have happened to the securities industry.
For more stories about leveraged ETFs, visit our long-short category.
For more stories about ETF Trends in the press, visit the ETF Trends in the press category.
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