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Five Dumbest Things on Wall Street: Aug. 21

SEC's Late Arrival

Wait a darn second here! Who woke up the SEC to the dangers of leveraged ETFs?

The Securities and Exchange Commission issued an investor alert Tuesday warning retail investors that leveraged and inverse exchange-traded funds are "highly complex financial products" that "can turn into a minefield for buy-and-hold investors."

Wait! You mean people can lose money in a blink by betting on leveraged ETFs? This is new?

Well, it would be new only to Rip van Winkle. While the SEC slept or studied the issue or did whatever it does, the debate over these high-powered financial instruments raged on our Web site and others for the past six months.

Last month, in the face of investor anger over outsized losses UBS (UBS) suspended purchases of leveraged and inverse ETFs for clients saying "the short-term nature of these securities is generally inconsistent with the long-term view of investing that UBS advocates when building client portfolios." Edward Jones, a St. Louis-based brokerage, and Minneapolis-based Ameriprise Financial (AMP) also halted leveraged-ETF sales a long time ago.

Meanwhile, like illegally downloaded movies, demand for these souped-up trading vehicles has only increased with every brokerage house ban and negative article.

For instance, the Direxion Daily Financial Bull 3X Shares (FAS), which seeks to return 300% of the daily performance of the Russell 1000 Financial Services Index, trades an average of 36 million shares a day, far outstripping most of the Dow 30 names. The FAS debuted in November 2008, so it's not even a year old. The ProShares Ultra Financials ETF (UYG), which debuted in February 2007 and offers two times leverage, trades a whopping 49 million shares a day.

For the record, we here at the Five Dumbest Lab believe individual investors have the right to buy leveraged ETFs once they are aware of the risks involved. Losing or making gobs of money in a very short time is the prerogative of every trader, not just institutions.

It just would have been nice for the SEC to make these risks better known before the losses grew out of hand and the class action suits started flying.

Dumb-o-meter score: 70 -- What we need is a leveraged SEC that works they times faster.

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