The Securities and Exchange Commission and the Financial Industry Regulatory Authority are back to issuing warnings about leveraged ETFs, butthey'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, overand over again and has been well known since the advent of inverse mutual funds severalyears ago. These funds track the underlying index only for a specific period and areunsuitable 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, inverseor double inverse of the daily performance of the underlying index. There are other fundsthat track monthly indexes, but these also will deliver a different return for investors who donot buy and sell at the beginning and end of the month. Compounding errors cause these funds to differ wildly from their target over longer timeperiods 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 lostmoney even though the underlying long index also lost money, even when the losses in theunderlying index were substantial. On the other hand, the SEC and FINRA would save themselves a lot of trouble if they spelledout disclosure rules. Perhaps a giant neon pop-up accompanied by loud music could displaya warning to investors whenever they first log on to a leveraged ETF Web site. Maybe, likecigarettes, they'd prefer a giant warning label on clients brokerage statements.
The point is that firms such as UBS, Edward Jones, Morgan Stanley and others, havebanned or restricted access to leveraged ETFs. The regulators need to decide whetheraccess should be restricted or whether there needs to be more prominent disclosure, thoughthe providers ProShares and Direxion have information right on the first page of theirWeb sites. I've called for restricting access to leveraged ETFs to only those investors cleared for marginor options trading. These ETFs aren't suitable for unsophisticated do-it-yourself investors. But it's time for the regulators to put this issue to rest. At some point, the information saturationpoint is reached, and if FINRA and the SEC believe some investors still aren't getting themessage, then it's time to stop retail investors from having access to these products. There are legitimate uses for leveraged funds, and the volume shows that traders areturning them over, using them as designed. A simple regulation would remove uncertaintyfor traders and providers, and save the regulatory agencies the need to issue warnings everyfew weeks.