Leveraged ETFs

Leveraged ETFs are speculative investments. Unless you are a speculative investor, an advisor or broker’s recommendation of such investments is likely violating legal duties he has to you.

Unique characteristics of these ETFs make them high risk. First, the investment, whose return mirrors the return of an underlying index, resets daily. This makes a multiple day loss almost insurmountable. As such, most regulators prohibit the holding of such an investment for more than a single day.

FINRA, the regulator overseeing brokerages, takes a similar position. FINRA states, “Because they reset each day, leveraged and inverse ETFs typically are inappropriate as an intermediate or long-term investment.” It goes on to say that only in a sophisticated trading strategy, should the position be held more than “one day.”

Second, when the underlying index starts to fall, the ETFs leveraged by the index accelerate the loss. A downward trend in the index prompts holders of leveraged funds to sell to avoid a heighten loss. These outflows further losses in the index as a whole. This vicious cycle is known as “negative gamma.”

Many advisors have lost their licenses due to recommending such investments.

Call Jeffrey Pederson to learn if you have recourse. Initial consultations are free and confidential.