If It Looks Too Good to Be True, It’s Probably a Leveraged (or Inverse) ETF (Part 1 of 4)

money_trap.jpgAuthor: Joanna LiCalsi (Law Student, Investor Justice Clinic, University of San Francisco School of Law)

Just like everyone else, investors may find themselves caught up in trends – especially when it looks like a lot of money can be made relatively easily. Leveraged and inverse mutual funds and exchange-traded funds (ETFs) are such trends, both developed and exploding in popularity only over the past few years. Some big name fund companies in this line of investments are Rydex, ProShares (sometimes traded as ProFunds), Direxion, and SGI. They are sold as either ETFs or mutual funds with promising names, which usually include words like “growth,” “income,” and “preferred.” And, as is the case with leveraged ETFs, these funds assure investors that not only will they outperform any given index, but their returns will be double or triple that of the underlying index.

Inverse ETFs are just what the name implies – they seek to deliver the inverse (or opposite) of the tracked index. This is basically betting against the market and on declines. All of this sound great, right?!?! That’s exactly why so many investors (and retirement funds) have fallen victim to them.

See related blog postings:

What Are Leveraged and Inverse ETFs?

Securities Regulators Step Up Oversight of Leverages and Inverse ETFs

Are Leveraged and Inverse ETFs Suitable for You?