Tue, July 28, 2009
Brokerage Firms Distancing Themselves From Leveraged/Inverse ETFs
As I noted about a month ago, FINRA has drawn attention to the fact that leveraged and inverse exchange-traded funds are often not appropriate for retail investors. In response, some prominent broker/dealer firms have announced that they are backing away from the sale of such ETFs
Saint-Louis based Edward D. Jones was the first, announcing its intention to stop selling leveraged ETFs. Ameriprise Financial and LPL Holdings soon followed suit.
Yesterday, Swiss-based UBS Wealth Management Americas announced that it would not only stop trading leveraged ETFs, but also any ETFs that sell an asset “short,” i.e. inverse funds. The firm’s stated reason was that such products don’t align with its long-term investing focus, since these products are constructed to perform on a daily basis. The Wall Street Journal also noted that Well Fargo Advisors is reviewing its policy toward “non-traditional” ETFs, so if they also bail on these products it won’t be a surprise.
FINRA’s public notice on these ETFs seems to be provoking epiphanies throughout the brokerage world. But it shouldn’t be news to a sophisticated firm like UBS that these products are unsuitable for long-term investing, so its statement is a bit strange. One wonders if the real motivation isn’t just face-saving for an investment bank that has gotten a lot of bad press in the last year. One can also imagine the legal departments at these firms fretting that the FINRA notice raises the likelihood of future litigation from disgruntled retail investors.
It seems likely that some other retail brokerage firms will move away from these products, which should be fine. The market for inverse and leveraged ETFs isn’t going to go away. They still have a use for investors who understand how they work and the risks that they entail, and I expect that savvy retail investors will still find places where they can buy them.
RELATED POSTS:
Exchange Traded Funds 101 – Part 1
Exchange Traded Funds 101 – Part 2
Leveraged/Inverse Exchange-Traded Funds Draw FINRA Warning
Leverage and Exchange-Traded Funds Don’t Necessarily Mix: The Leverage Trap
MA Secretary of State Investigating Leveraged Exchange-Traded Funds
Some ETFs Are Scarier Than Others