Corporate & Securities Law

Leveraged, Inverse ETF Sales Grow, Along With Risks

By Keith Griffin

Sales of specialized exchange-traded funds (ETFs) are on the rise. And so is the risk, including liquidity concerns, hidden costs, and overall structure.

Despite these issues, many investors have become enamored with ETFs - and, in particular, inverse and leveraged ETFs - on the advice of their broker. Inverse ETFs are constructed by using derivatives that, in turn, create a security. This security then profits from a decline in the underlying index or benchmark.

This year, inverse and leveraged ETFs became the subject of scrutiny from the North American Securities Administrators Association, which placed the products on its watch list of ?investor traps.?

Similarly, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have both issued notices to investors about the risks associated with leveraged and inverse ETFs.

Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors, however, might invest in these ETFs with the expectation they may meet their stated daily performance objectives over the long term, as well. What many investors fail to realize is that the performance of leveraged and inverse ETFs over a period longer than one day can differ significantly from the stated daily performance objectives of the products.

Full post as published by Representing Investors on November 12, 2010 (boomark / email).