Exchange traded fund traders who have utilized leveraged and inverse products to hedge positions or capitalize on swift market turns will be watching the Securities and Exchange Commission this week as the regulatory body is set to make an announcement on the use of derivatives in fund products.
On Friday, the SEC is set to propose new rules on the use of derivatives, which are expected to have a large effect on the leveraged instruments that try to deliver two- or even three-times the returns of their benchmark indices, report Andrew Ackerman and Leslie Josephs for the Wall Street Journal.
Leveraged ETFs utilize financial derivatives and debt instruments to amply returns of an underlying index by minus 200% and 300% or positive 200% and 300%.
Regulators contend that these products commonly known as leveraged ETFs can be volatile and expose investors to sudden, outsize losses. [Do You Know How Your Leveraged ETFs Work?]
The SEC and the Financial Industry Regulatory Authority have previously warned that these “highly complex financial instruments… can differ significantly from their state daily objective,” reports Chris Dieterich for Barron’s. The SEC’s Office of Investor Education and Advocacy previously warned that leveraged ETFs may be “unsuitable for long-term investors.”
Friday’s proposal is expected to make it more difficult for certain funds to implement derivatives, though details remain unclear. The SEC has announced that it would vote Friday on new rules governing “the use of derivatives by registered investment companies.” While the market is still speculating on the details, fund companies like ProShares Advisors and Direxion Investments could be affected.