Leveraged ETFs: Desperate Times

The real test for leveraged funds will come from the "do-it-yourself" brokerages, such as E*Trade (EFTC)(ETFC) and Ameritrade(AMTD). These firms have less responsibility to their clients because they are not in the position of making recommendations, although they may also decide to step up investor education and/or restrict access in a manner similar to options and other more complex products.

If retail investors are regulated or restricted from these products, the supply of funds for the leveraged segment of the ETF market will be reduced and affect the viability of less frequently traded products.

The current environment is one where fear of litigation and regulation is high following a financial crisis that was precipitated, in part, by complex financial instruments.

Leveraged ETFs run the risk of being painted as the boogeyman by opportunistic regulators or politicians looking to show they are "doing something," and investors may suffer by having markets closed to them by law, or as a byproduct of liquidity reducing regulations.

That financial professionals are using these products is evidence of their value to the marketplace. In many cases, maybe in most, that value does not extend to unsophisticated retail investors.

Brokers are wise to restrict access to clients who cannot make use of options and other more complex financial instruments. As I've argued previously: "It is important to remember that "ETFs" have spent more than a decade establishing themselves as transparent, low-cost products. New, exotic, high-cost ETF strategies are masquerading as approachable funds and could dupe investors."

Educating and protecting those investors is one of the most important things advisers can do for their clients.

Reported by Don Dion in Williamstown, Mass.

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