Author: Joanna LiCalsi (Law Student, Investor Justice Clinic, University of San Francisco School of Law)
So who should invest in leveraged and inverse mutual funds and exchange traded funds (ETFs)? If anyone at all, it might be the highly knowledgeable and experienced day-trader with loads of money to burn. Fund companies such as Direxion and ProShares state on their websites that leveraged ETFs are not suitable investments unless you “understand the risks… [and] consequences” associated with them and are willing to actively manage your portfolio. On the other hand, the companies say they are inappropriate if you “don’t understand” the risks and consequences, or if you’re a long-term investor who doesn’t plan on actively monitoring your portfolio. I would call this kind of advice lacking at best. While they make it clear that these funds inhabit some risk, they’re still salesmen (don’t ever forget it); and the main gist seems to be, “there’s risk involved, but if you understand the risks, then go for it!” Understanding the risk is just the first step. You have to look at your own bigger investment picture to make an informed choice; think about your goals, needs, portfolio composition, and timeline.
I read somewhere that fewer than 1% of all investors should be involved with these risky, controversial funds. If you’re reading this blog, you’re probably a responsible, smart, retail investor with long-term goals and little to no risk tolerance. Basically, you’re in the 99% of all other investors and they’re probably not for you. But if you insist on dipping your toes in the water, as always, please be sure to consult a trusted financial adviser and always make sure you check out (and understand) the prospectus before you invest.