Be Careful of Leveraged and Inverse ETFs

Leveraged and inverse ETFs have in recent months come to the attention of US Regulators regarding their suitability as long term investments for retail investors.

Just to recap, leveraged ETFs aim to double or triple the performance of an underlying benchmark, while inverse ETFs move in the opposite direction to their benchmark.

In theory, that is.

ProShares is one of the largest issuer of leveraged and short ETFs. The leveraged ones are easily identifiable by the word Ultra in front of the name while the inverse will have the word Short. There are also ETFs that are both leveraged and inverse. These will have the word Ultrashort.

The ProShares list of ETFs can be found here.

In reality, these ETFs may not always move in the direction that investors expect. If held for a longer term, some of these ETFs can lose big even when an investment in the underlying benchmark would have gained due to how the ETFs are structured.

For example, it was recorded that an ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index actually fell around 50 percent while the index gained around 8 percent. The related ETF seeking to deliver three times the inverse of the index’s daily return declined by 90 percent over the same period.

In June, Financial Industry Regulatory Authority, the industry’s self-regulating body, issued a warning indicating leveraged ETFs as unsuitable for retail investors for more than one trading session. It later amended the warnings to say that the ETFs can be appropriate for short-term investors under close supervision of financial professionals.

In mid July, Massachusetts regulators subpoenaed Ameriprise, UBS, LPL, among others, to produce information on revenues, sales, broker training and marketing materials related to these products.

ProShare Advisors said its ProShares funds “have performed consistent with their daily investment objectives as fully described in the prospectus,” in a statement responding to Massachusetts officials’ inquiries last month.

Still, several major brokerage houses have already stopped or suspended sales of these instruments for the time being.

In a nutshell, while inverse and leveraged ETFs may give you the desired exposure you want over the short-term, they are definitely not suitable as long term investments.

In Singapore, the only leveraged or inverse ETF that is listed so far is DBXT S&P Short 10US$. It is an inverse ETF based on the S&P Index.

Of course, you can access the whole range of ETFs by buying from the overseas market.

Trade with care!