ETF Investors Face Serious Risk with Both Inverse ETFs and Leveraged ETFs
Exchange traded funds (ETFs), which were originally designed for and are
exceptionally popular with institutional investors, are increasingly being
marketed to and purchased by individual investors - a fact the SEC and
FINRA find disturbing.
Recently, the two organizations issued a joint investor alert that warned
individual investors of the potential risks associated with ETFs, particularly
leveraged or inverse ETFs. (For more information, read the full alert
Exchange traded funds are complicated and risky products, and the differences
between them are so intricate that it can be almost impossible for individual
investors to understand the specifics of any one ETF well enough to compare
it to another. In the alert, the SEC and FINRA warned individual investors
about the products' inherent complexities and advised investors to
"evaluate each investment closely and not assume all ETFs are alike."
While most ETFs are registered investment companies whose shares represent
an interest in a portfolio of securities that track an underlying benchmark
or index, not all are. Some ETFs, particularly those that invest in commodities
or currencies, are unregistered - a fact investors should be aware of
if they want to protect themselves from fraud.
Investors who choose to invest in an ETF should be aware that they are
investing in a high-risk product. Common ETF investment strategies involve
short sales, swaps, futures contracts, and other
derivatives, all of which can expose the ETF and its investors to significant risk.
Long-term and intermediate investors should be particularly wary of non-traditional
ETFs, said the SEC and FINRA. "Because leveraged and inverse ETFs
reset each day, their performance can quickly diverge from the performance
of the underlying index or benchmark. In other words, it is possible that
you could suffer significant losses even if the long-term performance
of the index showed a gain," warned the regulators in the alert.
Additional risks ETF investors should be aware of include: potentially
costly fees and expenses, potential tax consequences, and the possibility
that the ETF will not meet its stated objective for the trading day.
For additional information on investing in ETFs, click