Exchange Traded Funds (“ETFs”) are typically registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. “Inverse” and “leveraged” ETFs are a sub-species of ETFs that attempt to magnify the returns of a particular index. A leveraged ETF uses borrowed money to not only attempt to track its index but to double or even triple its performance. An inverse ETF attempts to generate a performance which is exactly the opposite of the underlying index. Most leveraged and inverse ETFs “reset” daily, meaning they are designed to achieve their stated objectives only on the day of purchase.
While such ETFs are conceptually attractive because they can amplify the returns from an investor’s guess as to the direction of an index, leveraged and inverse ETF’s are hardly ever appropriate for an investor who plans to hold the ETF for more than one day. Indeed, securities regulators have explicitly warned financial advisors that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session.” See FINRA Regulatory Notice 09-31.
If your stockbroker or financial advisor recommended the purchase of an inverse or leveraged ETF for more than one day, or did not explain the risks associated with these securities, you may be the victim of investment fraud or negligence. Contact the attorneys at PCJ Law for a free, informative consultation at 901-820-4433