Leveraged ETFs (Still) Under Fire

by on July 21, 2009

Leveraged ETFs, while extremely popular among day traders and other sophisticated investors, have taken fire from all sides in recent months, first from industry analysts and retail investors, and then from regulatory agencies such as the SEC and FINRA. Now we can add the State of Massachusetts to the list of leveraged ETF detractors. Secretary of State William Galvin announced last week that his office will examine the sales practices of leveraged ETF providers, including Direxion, ProShares, and Rydex.

Galvin plans to investigate sales materials from the ETF sponsors, as well as “what they are telling” brokers who sell the products to tell customers. In justifying his investigation, Galvin touched upon the rapid rise in popularity of leveraged funds, saying “three years ago this market was almost nonexistent, and now there are 140 funds – we just want to make sure people know what they’re getting into.”

According to a recent Wall Street Journal article, all three firms targeted by Massachusetts plan to comply with the inquiry:

  • Direxion is “committed to the highest standards in sales practices,” said Andy O’Rourke, marketing director.
  • ProShares indicated it is confident its “sales and marketing materials are accurate.”
  • Rydex believes its disclosures include the “information necessary for investors to make informed decisions.”

Let’s Be Reasonable Here…

At this point, only investors returning from an extended vacation on the moon are unaware of the issues that arise from making long-term investments in leveraged ETFs. At the risk of sounding like a broken record, all indications are that leveraged ETF sponsors have taken a keen interest in keeping unsophisticated investors away from their products. The quantity of literature available at the click of a mouse detailing risks of investments in leveraged ETFs is staggering. The information centers maintained by leveraged ETF issuers are both easy-to-find and easy-to-understand. And I’m yet to see any evidence (beyond the anecdotal) that these funds are being used inappropriately by investors (I’m keeping my fingers crossed that the results of data sweep conducted by FINRA earlier this month will be released in some form).

Last week’s announcement out of Massachusetts reeks of politics as usual. Galvin seems like a politician out to make a name for himself, and the leveraged ETF debate presented itself as a viable controversy that has been commanding a lot of attention, particularly in the investment world. Leveraged ETF sponsors are already subject to oversight from numerous regulatory bodies at present, including the SEC and FINRA, both of whom have made very clear indications that they are watching these funds (and their sponsors) very closely. The idea that the Secretary of State from Massachusetts is going to step in and resolve the crisis is laughable, particularly at a time when there are so clearly much larger issues to resolve.

Disclosure: No positions at time of writing.