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TMFBro (< 20)

The end of leveraged and inverse ETFs?



August 04, 2009 – Comments (3)

The Wall Street Journal reports that brokerages are curbing the sales of inverse and turbo-charged ETFs, and regulators are taking a look, too:

"In recent weeks, major financial-services firms including Ameriprise Financial Inc., LPL Financial Corp. and UBS AG's UBS Wealth Management Americas have suspended or restricted sales of leveraged and inverse ETFs. These funds, which trade throughout the day like a stock, aim to deliver some multiple of an index's returns, usually on a daily basis.

"Massachusetts regulators on Friday sent subpoenas to Ameriprise, UBS, LPL and Edward Jones, requesting information on sales of the products, the revenue generated from those sales, and broker training and marketing materials.

"Even brokerage firms that haven't suspended sales of the funds are sounding cautionary notes. Morgan Stanley Smith Barney, a joint venture of Morgan Stanley and Citigroup Inc., said it is reviewing sales of these ETFs, while Charles Schwab Corp. recently issued a report warning investors of the products' intricacies."

Why all the fuss? Because if held for more than a day, the returns of inverse and leveraged ETFs can be very different from what an investor might expect. According to the Journal:

"Take ProShares UltraShort Financials ETF, which aims to deliver double the opposite of the daily performance of the Dow Jones U.S. Financials Index. Since the index was down about 26% in the first three months of this year, a casual investor might expect the fund to post significant gains. Instead, it lost roughly 5%.

"Data from investment-research firm Morningstar Inc. show that such performance 'surprises' can be more the norm than the exception in rocky markets. In the 12 months ending July 24, 55% of leveraged ETFs and nearly 88% of inverse ETFs were 'flipped,' meaning they delivered negative returns when investors would normally expect positive returns, or vice versa."


3 Comments – Post Your Own

#1) On August 04, 2009 at 2:51 PM, brickcityman (< 20) wrote:

All of this is such total BS.


If I had to get guess all of this is motivated by corporate pointy headed lawyers as a CYA initiative.


Banning a product like this just because if used improperly it will burn you makes no sense.  You might as well ban options, penny stocks, and for that matter put up a safety net around companies teetering on the edge of bankruptcy...  Heck while we at it you better ban small cap IPOs and public listing for firms that are anything other than long established brand names! 


My favorite argument against these things is that if you invest X dollars back in early fall '08 now it would be worth substantially less...  Well yeah, but that overlooks that during the middle there were points where they were worth a fabuluous premium.  Give me most any publically listed stock with a reasonable history on the market and I can pick two points that would yield horrendous returns just like I can pick two points that yield the opposite.


The only credible case against things like this is if there is outright fraud in terms of how they are sold.  No one has proven  fraud (unless some brokers were selling these to their clients, which is a wholly separate issue).


Bottom line, if you're going to pursue a world where every investor has to wear a helmet then it won't be long before we're all riding the short bus.

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#2) On August 04, 2009 at 6:08 PM, SuperCharge (74.47) wrote:

It would make sense if they were doing this to help stableize the price of commodities like oil & gas although I'm not quite sure how much of an effect it'd have.

As I was until last year, if you're unfamiliar with the compounding returns issue for leveraged ETF's, see below. The strategy does seem to work for top CAPS players though...

Warning: Leveraged and Inverse ETFs Kill Portfolios

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#3) On August 04, 2009 at 11:02 PM, Tastylunch (28.75) wrote:

Good post

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