Leveraged ETFs Cut by Edward Jones

Edward Jones & Co. has halted the sale of leveraged ETFs, citing the products as "misunderstood and potentially dangerous." A July 21 Wall Street Journal article reports that the St. Louis-based firm stopped selling the enhanced funds, which are designed for use by sophisticated daily investors, not long-term holders.

As the ETF industry continues to grow, this announcement will hopefully help to sharpen its focus. Investors who seek out ETFs for their low cost structure and transparent nature may have difficulty in the current ETF sales environment telling the difference between traditional and non-traditional ETF products.

Edward Jones decided in its June review of investment products to cut leveraged ETFs from the lineup. Edward Jones mutual fund research analyst Katie Martin authored a report titled "not all ETFs are created equal," citing the dangers of exchange-traded notes and structured products with similar methodologies to leveraged ETFs.

"Investors also need to recognize that leveraged ETFs have an increased potential for capital gains distributions and significantly higher expense ratios than the traditionally broadly based stock market ETFs, negating some of the benefits of purchasing an ETF," noted the Edward Jones report, as quoted in The Wall Street Journal article.

Edward Jones hit the nail on the head when it cites that the realities of leveraged funds are "negating some of the benefits of purchasing an ETF." It is crucially important for investors to understand how ETF issuers and traders pay their rent -- and it isn't typically just from traditional ETFs. (See "Hedging Your ETF Bets.")