Exchange-traded funds ("ETFs") are basically entire portfolios
of securities, a "basket of securities," which are traded like
individual stocks on an exchange. ETFs are typically registered unit investment
trusts or open-end investment companies whose shares represent an interest
in a portfolio of securities that track an underlying benchmark or index.
Leveraged ETFs, a non-traditional type of ETF, seek to deliver multiples
of the performance of the index or benchmark they track. Some leveraged
ETFs are "inverse" or "short" funds, meaning that
they seek to deliver the opposite of the performance of the index or benchmark
Some funds are both short and leveraged, meaning that they seek to achieve
a return that is a multiple of the inverse performance of the underlying
index. An inverse ETF that tracks the S&P 500, for example, seeks
to deliver the inverse of the performance of the S&P 500 (like the
ProShares Short S&P500 ETF, fund symbol: SH), while a 2x leveraged
inverse S&P 500 ETF seeks to deliver twice the opposite of that index's
performance (like the ProShares UltraShort S&P500 ETF, fund symbol: SDS).
Most of these non-traditional ETFs seek to achieve their investment objective
over the course of a single day. For example, the Direxion Daily Small
Cap Bear 3x Shares (Fund symbol: TZA) seeks daily investment results of
300% (3x) of the inverse (or opposite) of the price performance of the
Russell 2000 Index. The keyword being daily - not monthly, and definitely
Such non-traditional leveraged and inverse ETFs are not meant to be held
as long-term investments. By holding these ETFs longer than their indicated
compounding period (i.e., for longer than a single trading day), investors
are almost mathematically guaranteed to get a return that is nowhere near
the return of the index it tracks; the statistical probability that the
investor will get nothing close to (in this case) triple the return increases
when it is held for longer than the indicated compounding period. Such
investments are required to be monitored closely due to their volatility
and inability to track the underlying index over an extended period of time.
Non-traditional ETFs are suitable for only the most sophisticated investors.
However, such investments have grown substantially in recent times, attracting
billions of dollars. Such growth is an indication that these investments
are being mis-used and mis-sold.
The investment fraud Meyer Wilson helps clients nationwide recover losses
from claims relating to the sales of exchange-traded funds ("ETFs").
Contact the law firm of David Meyer & Associates.