Finra Reminds Brokers to Proceed with Caution on Leveraged ETFs
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Tuesday, June 23, 2009

Finra Reminds Brokers to Proceed with Caution on Leveraged ETFs

In Tuesday's Wall Street Journal Fund Track, Daisy Maxey picks up on a reminder Finra issued earlier this month regarding sales of leveraged and inverse ETFs.

"While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis," the June 11 notice read. "Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, 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, particularly in volatile markets."

Commenting on the notice, ProFunds Group CEO Michael Sapir told Maxey that while his firm supports efforts to educate brokers, such ETFs "are not more complicated than numerous funds in the marketplace"

Sapir added that such funds are suitable for people to use for more than a day to pursue strategies to limit risk or pursue returns. Bethesda, Maryland-based ProFunds Group counts $27 billion of assets in its leveraged long, leveraged short and short ETFs.

For his part, Morningstar's director of ETF analysis, Scott Burns, hailed the notice as a "huge step forward toward protecting investors from having exposure to these products unwittingly inserted to their portfolios."

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