Securities Lawyers Blog
A leveraged Exchange Traded Fund (non-traditional or leveraged ETFs) is a security that employs debt, or leverage, in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most security indexes such as the S&P 500 and Nasdaq 100. A leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.
Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. The Financial Industry Regulatory Authority (FINRA) has acknowledged that leveraged ETF carry significant risks and are inherent complexity of the products. Accordingly, FINRA advises brokers that nontraditional ETFs are typically not suitable for retail investors.
Recently, FINRA sanctioned and suspended broker Michael E. French (French) over allegations that the broker recommended unsuitable transactions in leveraged and inverse ETFs in the accounts of elderly customers. FINRA also alleged that French held the leveraged ETFs in his customers’ accounts for extended periods contrary to Wells Fargo Advisor’s (Wells Fargo) written supervisory procedures.