In recent years many investors have flocked to Exchange Traded Funds’ or ETF.
Along came Leveraged ETFs and dramatically increased the risks for investors.Leveraged ETFs are bundles of derivatives. These derivatives are not stand-alone assets such as an ounce of gold. Derivatives includes options, swaps, foreign exchange instruments, and some really exotic instruments. The more leveraged, the more exotic.
Therein lies the problem. Derivatives and leveraged exchange traded funds are so complex that few people understand them. That includes the brokers who often sell them based on promises of quick and dramatic profits.
As these leveraged ETFs became more popular, so did warnings from regulators. In June of 2009, the Financial Industry Regulatory Authority (FINRA) warned brokers that they must provide special training to brokers selling these instruments and must insure that customers fully understand what they are buying and the risks involved.
The SEC chimed in two months later and warned customers that buy these products to have a broker willing to constantly monitor these funds. Specifically, the SEC says:
Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment professional should understand these complex products, be able to explain whether or how they fit with your objectives, and be willing to monitor your investment…
… As with all investments, it pays to do your own homework. Only invest if you are confident the product can help you meet your investment objectives and you are knowledgeable and comfortable with the risks associated with these specialized ETFs.
Unfortunately, many brokers continue to sell these products to unsuspecting investors. While institutional investors and professional traders may understand the risks, most regular investors do not.
Another problem is suitability. Industry regulations say that brokers can only make recommendations that are suitable for their client. Because leveraged ETFs are so volatile, they are not suitable for most investors. Brokers sometimes recommend them, however, because they can earn higher commissions. Some brokers tell clients that these investments have a tremendous upside potential in as little as a day. That’s true but you could also be wiped out in as little as a day.
If you purchased Leveraged ETFs and lost money, we may be able to help you get back your hard earned money. Both the stockbroker who recommended the investment and the brokerage firm he works for can be help liable. To learn more, visit our stockbroker fraud information page.
Ready to see if you have a case? Contact us online, by email or by phone . All inquiries kept strictly confidential.
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