Futures ETFs Under Fire

The problem with leveraged funds is different, but it also involves futures contracts. Fund issuers such as ProShares, Direxion and Rydex use futures to enhance the returns of an underlying investment. It is like taking blue and yellow paint, adding a secret ingredient and producing neon green.

To see why popular ETFs like Direxion Daily Financial Bull 3X(FAS) and Daily Financial Bear 3X(FAZ) can be dangerous to your portfolio, watch the video below.

Two ETFs to Avoid

Regulatory agency FINRA is becoming concerned that investors don't understand that leveraged funds aren't appropriate for everyone. There has been a run on neon green paint lately and the way in which some consumers are using it has turned out to be toxic. Brokers like UBS(UBS) and Ameriprise(AMP) have stopped selling leveraged funds to investors, rather than deal with consumers who use neon green the wrong way and get poisoned.

Commentators, brokers and ETF issuers alike have made the mistake in thinking that the public would not understand the complexity of their strategies. Two dangers currently plague the industry. First is that increasingly complex commodity and leveraged strategies will remain lumped together under the innocuous title of "ETF." Second is that brokers, regulators and consumers will throw the baby out with the bathwater -- banning funds that they don't understand.

ETFs should be re-categorized based on how they are composed. Lumping leveraged and commodity strategies under the banner of "ETF" oversimplifies the strategies and the risks. Investors should have to be qualified, as with options, to invest in risky futures-based strategies. This would allow qualified investors to use leveraged and commodity funds for their intended purpose and keep issuers from marketing complex products to an unsuspecting audience. -- Written by Don Dion in Williamstown, Mass.

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