Schwab Hangs a 'Proceed With Extreme Caution' Tag on Leveraged ETFs
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Thursday, July 30, 2009

Schwab Hangs a 'Proceed With Extreme Caution' Tag on Leveraged ETFs

Brokerages' stance on leveraged ETFs continue to attract media attention. As previously reported by The MFWire Morgan Stanley Smith Barney has placed the issue "under review", while UBS has halted sales of the funds altogether.

In Thursday's Wall Street Journal Fund Track column, Daisy Maxey mentions MSSB and UBS, and adds that while Charles Schwab continues to offer such funds, a highly cautionary educational piece appeared on the brokerage's website on Tuesday.

Titled Leveraged and InverseETFs: Not Right for Everyone, the piece compares what it refers to as "naive expectations" to "actual returns" for the funds -- the point being that "while there may be limited occasions where a leverages or inverse ETF may be useful for some types of investors, it is extremely important to understand that, for holding periods longer than a day, these funds may not give you the returns you may be expecting." Overall,Schwab urges investors to "proceed with extreme caution" when considering using leveraged funds.

This isn't the first time Schwab has cautioned against the use of such products. In February, an educational note titled ETFs: A Cautionary Tale warned against the possible tax inefficiencies of leveraged ETFs, and told investors "if you invest in ETFs, we suggest that you favor traditional, broad-based ones...make sure your ETF has over $50 million in assets, has over $1 million in daily volume, isn't leveraged (avoid any ETF with "ultra," "short," "2x" or "3x" in its name) and isn't actually an ETN."

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