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TheStreet Open House

A Leveraged ETF Warning Again. Yawn

Stocks in this article: FAS FAZ

The Securities and Exchange Commission and the Financial Industry Regulatory Authority are back to issuing warnings about leveraged ETFs, but they're not offering any advice you haven't already heard countless times, from the issuers themselves no less.

FINRA and the SEC repeated the same advice I and others have repeatedly offered, over and over again and has been well known since the advent of inverse mutual funds several years ago. These funds track the underlying index only for a specific period and are unsuitable for long-term investors; in many cases long-term means more than a day.

ProShares and Direxion ETFs (such as the popular FAS and FAZ) offer double, triple, inverse or double inverse of the daily performance of the underlying index. There are other funds that track monthly indexes, but these also will deliver a different return for investors who do not buy and sell at the beginning and end of the month.

Compounding errors cause these funds to differ wildly from their target over longer time periods and volatility exacerbates the problem. Sometimes this will work in investors' favor, but the past year has seen the opposite. In many cases, the double inverse funds lost money even though the underlying long index also lost money, even when the losses in the underlying index were substantial.

On the other hand, the SEC and FINRA would save themselves a lot of trouble if they spelled out disclosure rules. Perhaps a giant neon pop-up accompanied by loud music could display a warning to investors whenever they first log on to a leveraged ETF Web site. Maybe, like cigarettes, they'd prefer a giant warning label on clientsÂ’ brokerage statements.

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