Don’t Let Regulators Shut The Door On Leveraged ETFs

| September 11, 2009 | 0 Comments

As the resident ETF expert, I’m always on the lookout for new ways to make money with these wonderful financial tools.  Some of the most exciting developments over the last few years are the leveraged and inverse ETFs.

As a regular reader of the Dynamic Wealth Report, you’ve seen me write about these before.  I’m a big fan of leveraged and inverse ETFs.

But I’m sorry to say if you have a managed account at some big bank or brokerage, you’ll never hear about some of the most exciting new products.

It’s not because your broker doesn’t want you to make money.  It’s not because he doesn’t know about these products (the smarter brokers do). They’re not allowed to offer these ETFs to anyone.

Here’s the deal.

Regulators are turning up the heat on anyone involved with leveraged ETFs.  The list includes the ETF providers like Profunds’ ProShares and Deutsche Bank’s Powershares.  They’re also looking at brokers and the exchanges.

All of the extra attention from regulators has some major players running scared.

Take Wells Fargo for example.  They’re no longer offering leveraged or inverse ETFs to anyone with a managed account.  And Deutsche Bank is shutting down one of its most popular leveraged ETFs.

The reason brokers are pulling these products off the shelf is FINRA (Financial Industry Regulatory Authority).  They sent a ‘shot across the bow’ of brokers reminding them they’re looking over their shoulder.  And it got everyone’s attention.

FINRA’s main point of contention is the investor’s suitability to these types of investments.  The fact is leveraged ETFs deliver the targeted return for one day.  But the relationship can breakdown over time periods longer than a single day.  And the effects are amplified in times of increased volatility, like we’ve had the past year.

Their conclusion is leveraged and inverse ETFs aren’t suitable for buy-and-hold investors with a long term time horizon.  (But if you’ve read the prospectus or their website, you’d already know this.)

The truth is I don’t think regulators are done, not by a long shot.  It’s going to get more difficult to trade leveraged and inverse ETFs.  In the not so distant future, you’ll need specific approval, like option trading already requires, to trade them.

Regulations aside, here’s why I like these leveraged and inverse ETF so much… Take a look at the recent move of the first ETF to offer three times (300%) leverage of the S&P 500.  It’s the ProShares UltraPro S&P 500 (UPRO).

In the last six days, the S&P 500 is up just under 5%, but UPRO is up better than 15%.

It’s a great way to turn a decent profit into a windfall.  And you can do it in a short time frame.

As long as you understand these ETFs, they can deliver some impressive gains.  In my opinion, they’re best used for speculation with a short time horizon.  Make sure you take the time to understand the regulator’s ‘game’.  You don’t want to be left on the outside looking in…

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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