The end of leveraged and inverse ETFs?
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."