Leveraged & Inverse ETFs: Public Enemy Number One

symbol_hazard.pngBy now, readers of this blog are hopefully aware that we are very negative on the marketing and sale of leveraged and inverse exchange-traded funds (“ETFs”) to average investors. The New York Times recently published a news piece declaring that ETFs, like those offered by Direxion, were “Public Enemy No. 1.”

Still not convinced? Take a look at the year-to-date results for the worst performing Direxion ETFs through 10/7/2015 according to Morningstar–all of them triple-leveraged funds:

Direxion Daily Nat Gas Rltd Bull 3X ETF (GASL) -84.36%
Direxion Daily Brazil Bull 3X ETF (BRZU) -77.04%
Direxion Daily Russia Bear 3X ETF (RUSS) – 70.18%
Direxion Daily Latin America Bull 3X ETF (LBJ) -62.24%
Direxion Daily Gold Miners Bull 3X ETF (NUGT) -62.82%
Direxion Daily Jr Gld Mnrs Bull 3X ETF (JNUG) -60.54%
Direxion Daily Jr Gld Mnrs Bear 3X ETF (JDST) -54.59
Direxion Daily Energy Bull 3X (ERX) -42.22%

Leveraged and Inverse ETFs are Unsuitable for Most Investors

Leveraged and inverse ETFs are not intended for buy and hold investors. The folks who run these super-leveraged and super-risky ETFs acknowledge that the main customers of these funds are active day traders and hedge funds. In a January 2012 Forbes article, Direxion president Daniel O’Neill had this to say about leveraged ETFs:

They’re not appropriate for investors. You have to have the right attention span and risk tolerance, and essentially, they’re good for traders. They’re not really good for investors.

–Daniel O’Neill, President of Direxion

However, despite the risks and the warnings contained in the fund’s regulatory disclosures, financial advisors are recommending these ETFs to unqualified investors. For example, our securities law firm is currently pursuing a securities arbitration lawsuit on behalf of a widow whose advisor at LPL financial had her invest in a bear fund ETF that bet against the market between 2011 and 2013. LPL Financial has also been the subject of several multi-million dollar fines and customer lawsuits relating to the brokerage firm’s failure to supervise the sale of these risky ETFs to their customers.

Related Blog Posts:

Alcala Law Firm Files FINRA Arbitration Claim Against LPL Financial Over Risky Investments

LPL Financial Ordered to Pay $10 Million Fine and $1.7 Million in Restitution to Customers for Supervisory Lapses