ProShares was the original purveyor of leveraged funds and Michael Sapir, chairman and chief executive of ProFunds Group, 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 (SRS), UltraShort Financials (SKF) and Ultra Financials (UYG) 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.