Bob Pisani hit the nail on the head in an article posted on cnbc.com today regarding leveraged and inverse ETFs. He states that “financial advisors are not adequately explaining to the public what these ETFs do – and don’t do”. I’ll take it a step further – a number of financial advisors simply don’t understand what these ETFs do and don’t do. As is not uncommon at large brokerages, advisors have a tendency to simply sell the next “hot” investment to clients, a description that absolutely applies to leveraged and inverse ETFs which have seen assets increase by over $9 billion year-to-date. The problem is that a number of advisors have pushed leveraged and inverse ETFs without explaining to investors how they work or what role they play in the portfolio’s overall investment strategy (because many don’t understand themselves). As a result, and in the face of potential investor lawsuits, brokerages are suspending their use of leveraged and inverse ETFs by advisors (as UBS Wealth Management Americas did on Monday and Morgan Stanely Smith Barney and Charles Schwab are considering).
Unfortunately for large brokerage clients, this is just another example of corporate executives being forced to limit investment options because of potential liability concerns generated from sloppy, uneducated advisors. These types of “risk management” decisions by large brokerages inevitably lead to watered-down options for clients and can cause confusion for investors. A better approach might be to educate advisors so they can, in turn, properly educate their clients – though less educated clients often means more money for large brokerages.
As Pisani pointed out in his article, FINRA (Financial Industry Regulatory Authority) recently clarified their guidance on this topic stating, “Leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional. At times, this trading strategy might require a leveraged or inverse ETF to be held longer than one day.”
At The ETF Store, we spend countless hours educating ourselves on the intricacies of the more complex ETFs, such as the leveraged and inverse offerings. We’re not hindered by the legal burden of uneducated advisors and can offer unique, sophisticated strategies to clients based on a thorough understanding of the investments products we offer. Through our deep understanding of these products, we can educate our clients and expand, not limit, investment opportunities.
