Wall Street has a penchant for taking relatively simple products and molding them into complex portfolio killers. Witness the mutation of exchange traded funds or ETFs. Their scary offspring? Little monsters known as leveraged and inverse ETFs.
In their simple form, 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.
A leveraged ETF generally seeks 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, meaning that they seek a return that 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.
An investor whose broker has recommended ETFs should look carefully at what’s being offered. 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 your plain-vanilla ETFs, and they’re usually very bad places to put your money.
What you really need to understand is that leveraged and inverse ETF’s are not meant for mid-range or long term investing. They reset their market exposure each day, which means they’re designed to achieve their stated objective only on a daily basis. If you hold them longer than a day or two, they tend to produce nasty surprises. In fact, they can even move in the opposite direction from their stated objective.
Unfortunately, leveraged and inverse ETFs recently have been going mainstream. Stockbrokers and investment advisors are selling or recommending this stuff to retail customers for whom ETFs are too volatile, too risky, and too complicated. In fact, we doubt these investments are suitable for more than a tiny fraction of the folks who are being persuaded to buy them.
We’re now taking cases against brokers or investment advisors who sold leveraged or inverse ETFs issued by any of the following companies:
- BARCLAYS ISHARES
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.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.