SEC joins Finra in warning about use of leveraged and inverse ETFs

The Securities and Exchange Commission today got behind the Financial Industry Regulatory Authority Inc.’s effort to alert investors about the potential pitfalls of leveraged, inverse and leveraged-inverse exchange traded funds. “Not all ETFs are created equal,” John Gannon, Finra’s senior vice president for investor education, said in a statement. “Over time, leveraged and inverse ETFs can deviate substantially from the performance of the underlying benchmark, particularly in volatile periods,” he continued. “They are highly complex financial instruments that can turn into a minefield for buy-and-hold investors.” The two regulatory bodies outlined many of the potential hazards in an alert, “Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors.” The joint alert advises investors to consider leveraged and inverse ETFs only if they are confident the product can help meet their investment objectives, and only if they understand and are comfortable with the risks associated with these specialized ETFs. Because such ETFs are complex, the SEC and Finra also said investors should consider seeking the advice of an investment professional who understands the products and who is willing to monitor their performance. Though Finra has been trying to raise awareness about these complex products for weeks, the alert is the first such statement from the SEC warning investors about the risks involved. In June, Finra released a statement in which it told broker-dealers that inverse and leveraged ETFs “typically are unsuitable for retail investors” who hold them longer than a day. Finra clarified its position on such ETFs in a podcast July 13 in which it said member firms could recommend that a retail investor hold them for longer than one day, provided a suitability assessment is conducted with respect to such an investor and the ETF. But that hasn’t stopped a number of brokers from restricting the sale of leveraged and inverse ETFs or stopping their sale all together since Finra’s initial statement.