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 they track.
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 not annually.
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.