Exchange traded funds (ETFs) have been the subject of increasing criticism lately. What’s going on, and are the criticisms founded? Leveraged products, says John Spence for MarketWatch, have been the biggest target. Leveraged and inverse ETFs allow investors to maximize the market’s movements by one, two or three times.
Leveraged ETFs amplify the markets, while inverse funds allow investors the opportunity to profit as certain areas of the market fall.
But where the misunderstanding comes in is when investors use them for a purpose for which they were not intended – that is, buying and holding them. They’re designed to track the daily movements of the markets, but over time, internal compounding leads to tracking error. The providers of such ETFs have been open about the risks and truly want to educate investors as much as possible.
FINRA, however, recently put out an advisory reminding firms of their obligations. Among other things, the regulator of securities firms called for sales material to be fair and accurate.