Leveraged ETFs that magnify the market’s performance are facing more scrutiny. There are calls they should come with warnings or even that individual investors should be prohibited from buying the complex products.
“The starting point for regulators is to consider whether individuals should be able to buy a leveraged ETP [exchange traded product]with just a click of a mouse without at least affirming that they understand it is an especially complicated and risky investment,” wrote Tom Lauricella in a recent Wall Street Journal article. [Cleveland Fed Questions Market Risks of ETFs]
Regulators and the media are questioning leveraged and inverse ETFs after the meltdown in VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) in March, when the exchange traded note quickly lost 60% of its value. [Leveraged ETFs on the Hot Seat]
The SEC is probing the ETN’s swift decline that occurred when its premium collapsed. The product is designed to double the daily performance of CBOE Volatility Index futures contracts. [Caveat Emptor – Volatility ETFs]
The providers of leveraged and inverse ETFs say their products are designed to magnify the market’s returns on a daily basis, and are not designed for long-term investors.
“These products seek a daily goal,” said Andrew O’Rourke, chief marketing officer of Direxion Funds, in a recent InvestmentNews report. “They are absolutely not buy-and-hold investments and should not be viewed through the same lens as a typical buy-and-hold mutual fund.”