Looks Like I Picked The Wrong Week to Quit Drinking

• Posted by Adam Warner
• on August 6th, 2009

Looks like the Flight Out OF Quality has gained steam. ETF Trends notes this.

The controversy over leveraged exchange traded funds (ETFs) seems to continue to grow. The latest name to jump into the fray is Fidelity, which has warned customers that the products are complex.

 Fidelity is just the latest in a long line. Some of the largest investment advisory firms, like Ameriprise Financial (AMP), Raymond James (RJF) and UBS (UBS) have curtailed client activity in them or are completely getting their clients out of them.

Now if it strikes you as shutting the barn door after the horse has gone, you’re not alone. But are the firms doing the right thing? Michael Comeau says no, it’s just a convenient blame game.

It’s all really too bad, because the growing anti-leveraged ETF movement is all just a way of absolving investors and their advisors of personal responsibility.

Let me make something clear: I really don’t give a damn about leveraged ETFs. I’ve never owned one, traded one, or recommended one. At one point, I was tempted to play with the Direxion Daily Financial Bear 3X Shares (FAZ), but decided I didn’t want to live with the volatility. I also didn’t like all the gobbledygook in the prospectus about potential tracking errors versus the underlying.

What I do give a damn about is investors who may find these instruments useful, losing access to and liquidity in them, as fewer brokers deal in ETFs.

I would tend to agree. I don’t believe they should have ever started allowing these. But they did. We all have a responsibility to understand everything we trade. Now no one sits and reads a prospectus, but not sure it involved even that much effort. If you read financial blogs at all, we had you forewarned how Leveraged ETF’s work well over a year ago.

There’s probably a happy middle ground though. Maybe investors can simply sign off on a short form that lays out the characteristics and risks of these pups. Don’t you have to do that before you trade options? Or even futures?

 

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