As Markets Fall, ETF Investors Get Hammered


The dramatic swings in the financial markets are sure to cause many retail investors in exchange traded funds (ETF’s) to question whether their investment advisors were prudent in recommending the investments to customers and whether such advisors satisfied the obligation to provide customers with full disclosure of the risks of ETFs.

For the past several months there has been an increasing push for regulators to address suitability requirements for the sale of sophisticated ETFs, such as commodities-based and leveraged funds.The concern is warranted. ETFs have been growing at a very rapid pace , passing $1 trillion in assets at the end of last year. A large portion for that growth is from retail investors.

According to Pratt H. Davis of Page Perry, “Most investors have no idea of the substantial risk involved with owning certain types of ETFs, such as leveraged and inverse funds.” If your everyday investor is investing heavily in “leveraged” or “ultra” ETF’s they could be facing staggering losses if they ended up on the wrong side of the market, particularly if they are holding an leveraged index tracking ETF.

These concerns are also echoed recently in the financial industry. Commodity ETFs were recently named by a recent Bloomberg BusinessWeek article as the “Worst Investment in America.” Additionally the Securities and Exchange Commission is investigating whether ETFs are being used to hide large bets based on inside information.

Regulators have also expressed concerns about these products. In 2009, the SEC and Financial Industry Regulatory Authority Inc. published notices warning investors about leveraged and inverse ETFs. The SEC also indicated that it wanted to see if additional investor protections were warranted, particularly for leveraged and inverse ETFs. Finra also recently came out with another notice regarding the disclosures necessary for commodity futures-linked securities.

Experts have also repeatedly warned against the risks associated with ETFs based on obscure, thinly traded indices that can experience extreme volatility in unstable markets.

According to Mr. Davis, ” What is clear right now is that there are a lot of retail investors out there who have ETF’s in their portfolios and have no idea of what they have gotten into. In fact, a recent survey of investors confirmed that most had little idea of how the profuct works.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys are actively involved in representing investors in ETF cases. For further information, please contact us.