Leveraged ETFs No More, Maybe

By Dian Vujovich

Combine short-selling with leverage in exchange-traded funds (ETFs) and you’ve got a product with little long-term investing advantages. As a result, a few brokerage houses have stopped selling exchange-traded ETFs that use leverage strategies.

UBS Wealth Management Americans, Edward Jones and Ameriprise Financial all have quit selling leveraged and inverse ETFs even though they’ve been big money makers. According to State Street Corp, a company that makes ETFs, said that inverse and leveraged ETFs account for more than 5 percent of the $593 billion in U.S. listed ETF assets. That’s a chunk.

Exchange-traded funds are designed to behave like market indexes and trade all day just as stocks do. Unlike other ETFs, leveraged and inverse ETFs use swaps and derivatives to boost their returns.

The Financial Industry Regulatory Authority told brokers last month that these two types of ETFs probably aren’t right for individual investors who hold them longer than one day unless they are ” “closely monitored by a financial professional.”

Most individual investors I know may know what an ETF is but don’t have a clue as to how a leveraged or inverse one works– much less have a broker who monitors and reports back to their clients about them every day.

As you might imagine, not everybody agrees with the move not to sell these types of ETFs.

LPL Financial has decided to limit the amount of leveraged ETFs it sells. According to a Bloomberg.com piece, a spokesperson at LPL said that they wouldn’t sell those “with more than twice the long or short performance of the target index.”

And the Investment Company Institute, the trade organization that represents mutual funds, unit investment trusts and exchange-traded funds, wants more clarification.

I like the clarification idea. Particularly if it means that brokers selling these securities make it very very clear that their clients understand the ins and outs of the EFT they are purchasing.