Over the past year, leveraged and inverse exchange traded funds (ETFs) have come under scrutiny forcing the Financial Industry Regulatory Authority (FINRA) to increase margin limits to aid in curbing the volatility of these investment instruments. (What’s the beef with leveraged ETFs?)
Earlier this month, the margin requirements for leveraged and inverse ETFs have increased by a factor commensurate with the leverage of the ETF, reports Cinthia Murphy for Index Universe. Prior to the ruling, margin costs were 25% of the market value for a leveraged long ETF and 30% of the market value of a leveraged short ETF. What this means for investors is that those who hold leveraged and inverse ETFs will not be able to take on the same amount of margin as investors who hold traditional securities. (Leveraged ETFs are still attractive) .
Leveraged and inverse ETFs are a useful tool for investors who understand how they work, so be sure to do your due diligence before you buy. (The ins and outs of leveraged ETFs).
For more on leveraged ETFs, visit our leveraged ETF category.