Leveraged and Inverse ETFs Too Complicated and Risky for Most Investors

Many investors buy exchange-traded funds, more commonly called ETFs.  ETFs are usually registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Shares of ETFs trade daily on a securities exchange at prices established by the market.

But watch out if your financial adviser is recommending or has sold to you products known as “leveraged” or “inverse” ETFs. If the ETF includes in its name words like Ultra, 2X, Double Long, or Inverse, it’s a leveraged or inverse fund. These aren’t suitable for most investors.

A leveraged ETF aims to return some multiple of the daily performance of the index or benchmark it tracks –hence terms like “2X,” “double,” or even “triple” — while an inverse ETF generally aims to deliver the opposite of the daily performance of the index or benchmark it tracks. Some ETFs are both inverse and leveraged; the return they target is a multiple of the inverse performance of the underlying index. To accomplish this enhanced result, leveraged and inverse ETFs use a variety of options, swaps, and index futures most people would never be interested in using or competent to use on their own.

Any investor whose broker recommends ETFs should look carefully at what’s being offered. It’s important to understand that leveraged and inverse ETF’s reset their market exposure each day, which means they’re designed to achieve their stated objective only on a daily basis. They are not meant for mid-range or long term investing. If you hold one longer than a day or two, it can tend to deviate from the index it targets and can even move in the opposite direction from that index.

Unfortunately, some stockbrokers and investment advisors sell or recommend leveraged and inverse ETFs to retail customers. But these investments are too volatile, too risky, and too complicated for anyone but sophisticated and aggressive day traders.  That means these investments are unsuitable for all but a tiny fraction of the folks who are being persuaded to buy them.

We take cases against brokers or investment advisors who have sold leveraged or inverse ETFs to their customers. If you’ve suffered losses in ETFs with names containing words like “ultra,” “2x,” “3x,” “double long,” or “inverse,” we’ll review your account without cost or obligation and tell you whether we can help you recover all or some of your money. Contact Hugh Berkson at 216-696-1422 or toll free at 866-932-1295, email him at hdb@mccarthylebit.com, or fill out the form to the right.