According to the North American Securities Administrators Association (NASAA) “Exchange–traded funds (ETFs) have grown increasingly popular with retail investors during the last decade.” The fact that retail, everyday investors are more frequently investing in ETF’s is reportedly a concern for securities regulators because “investors may not understand how these complex investment products work or the potential risks they may face.” The NASAA put out an investor advisory in the summer of 2011 attempting to caution and educate investors in ETF’s and the Financial Industry Regulatory Authority (FINRA) has also weighed in on the potential risks of some ETF’s in an investor alert of their own.
The NASAA describes ETF’s as “baskets of investments such as stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector.” ETF’s have been around for some time, but it has only been in the last couple years where the market hasn’t been almost exclusively the territory of sophisticated investors.
Traditional ETF’s are often compared to mutual funds and have drawn in retail investors. In some cases traditional ETF’s may be suitable for everyday investors seeking long term returns, but as FINRA states “ETFs have evolved over the years, becoming more complex. Investors considering ETFs should evaluate each investment closely and not assume all ETFs are alike.” New and more complex ETF’s, also called synthetic or non-traditional, like inverse and leveraged ETF’s, may not be suitable for most everyday investors. Both the NASAA and FINRA stress that investors need to understand the ETF they are going to purchase before investing.
The NASAA said, “Synthetic products like leveraged or inverse ETFs are not appropriate for “buy and hold” investors because an ETF may reset each day, and its performance may quickly deviate from the underlying index, currency, commodity or basket of assets it is attempting to mirror. “ If an investor is holding leveraged or inverse ETF’s in their portfolio, they may be unsuitably invested in ETF’s. Some of the industry leaders in inverse and leveraged ETF’s are Direxion Funds, ProShares, and Rydex.
The NASAA’s advisory seeks to educate investors about some of the risks associated with ETF’s including the potential for liquidation, tax consequences of non-traditional ETF’s, Redemption issues, and potentially high fees. FINRA’s investor alert similarly urges investors to understand the product and ask a lot of questions about the products to the financial professional who recommends them to you.
Leveraged and inverse ETF’s in particular have been the source of an increasing amount of securities litigation. It appears that as non-traditional ETF’s increased in popularity some financial professionals and brokerage firms were unsuitably recommending the investments to everyday investors. As indicated by the concern of both the NASAA and FINRA, non-traditional ETF’s, like many of the ones offered by Direxion Funds, ProShares, and Rydex, may not be suitable for everyday retail investors.
If you invested in leveraged or inverse ETF’s, like those offered by Direxion Funds, ProShares, or Rydex, suffered investment losses and would like to speak to a securities attorney about your potential to recover your investment through FINRA arbitration please call our Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.