According to a recent article in InvestmentNews, leveraged and inverse exchange traded funds are high on the state securities regulators’ watch list of “investor traps.”
According to Keith Woodwell, director of the Utah Commerce Department Division of Securities. “It is specifically related to complaints about leveraged and inverse ETFs. The concern is that they’ve become very mainstream.”
As the article explains, leveraged ETFs are designed to return a multiple of the daily performance of the stock index they track. Many investors are unaware that they can lose significant amounts of money by using a buy-and-hold strategy even in instances where the stock index increases over time. Inverse ETFs are built by using derivatives instruments to develop a security that profits from a decline in the underlying index or benchmark.
Many investors are unaware that leveraged and inverse ETFs may contain hidden traps and complexities, and may consist of highly leveraged bundles of exotic financial instruments, including options and other derivatives. Given their potential for volatility, leveraged ETFs are not suitable for most retail investors.
“The question is, is it being marketed to someone as a buy and hold kind of product,” Mr. Woodwell said. “It doesn’t perform the way you might expect, and if that’s not disclosed to the clients upfront, that’s where the suitability issues come in.”
The InvestmentNews article goes on to point out a disturbing trend recognized by securities lawyers handling such cases-promoters of such fraudulent investment schemes are also turning to social media and online communities, such as Facebook, Twitter, Craigslist and YouTube to solicit unsuspecting investors. Investors need to beware of the existence of these types of scams as more of these securities are marketed though various social media channels that individuals have come to trust.
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 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in ETF cases. For further information, please contact us.