was the original purveyor of leveraged funds and Michael Sapir, chairman and chief executive of
, is naturally defensive about the recent backlash. Sapir asserted in a recent
Wall Street Journal
article that leveraged funds are "not more complicated than numerous funds in the marketplace used by retail investors and recommended by brokers."
He has a point. Futures-based commodity ETFs also employ a potentially dangerous level of complexity, while ETNs expose investors to risk they don't always understand. Older ProShares leveraged funds such as
UltraShort Real Estate
employed a somewhat simpler methodology than their contemporary peers. As it is impossible to generalize about the nature of all ETFs, it is also impossible to generalize about the nature of leveraged ETFs.
Leveraged ETFs can be useful tools for professional traders looking to hedge positions on an intraday basis. These funds have been marketed to the public, however, and until recently the image has been somewhat deceptive.
FINRA posted a warning on its Web site earlier this month about leveraged ETF products, and increased regulatory scrutiny is likely coming down the line. No one would argue that matches and blowtorches are the same thing -- but there is a place for both in harnessing the power of fire. There is a place for both leveraged and index ETFs, but investors must understand which ones they need.
Split Could Set Straight Two Direxion ETFs
Originally published 07/07/09 09:00 AM EDT
The combination of market volatility and the methodology of
Direxion Shares Daily Financial Bull
Direxion Shares Daily Financial Bear
has eroded the per-share value of these ETFs, prompting the issuer to notify investors of reverse splits planned for July 8.