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As the Wall Street Journal notes in its recent article “Investors Can’t Get Enough of Wall Street’s Sucker’s Bet,” “the distinction between an investment and a gamble lies in the odds of success.” Leveraged and inverse exchange-traded funds (ETFs) often have “odds resembling a casino game.”

What are Leveraged and Inverse ETFs?

Traditional ETFs generally act much like mutual funds in that shares represent an interest in a portfolio of securities that often track an underlying benchmark or index. Unlike traditional mutual funds, however, shares in an ETF typically trade throughout the day on an exchange at prices established by the market.

Leveraged ETFs are non-traditional ETFs that seek to deliver multiples of the performance of the benchmark or index they track. Leveraged inverse ETFs seek to achieve a return that is a multiple of the inverse performance of the underlying index. For example, a 3x leveraged inverse ETF based on the S&P 500 would lose 6% on a day the S&P 500 gained 2%.

Importantly, leveraged and inverse ETFs are “reset” daily, meaning they are designed to achieve their stated objective only on a daily basis. For that reason, these funds are intended to be held for very short periods of time. (According to FINRA Notice 09-31, inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session.)

An Investment or a Gamble?

While a traditional ETF can be a valuable investment tool, leveraged and inverse ETFs are extremely risky. For example, the WSJ tracked one such fund, the Direxion Daily Financial Bear 3X Shares Fund, “which has lost money on 54% of days and every calendar year since its launch in late 2008.” To illustrate the fact that these funds are intended to be held for short periods of time, the Wall Street Journal calculated that a $10,000 investment in Direxion Daily Financial Bear Fund made in 2008 is now worth about $2.

If you are an investor who has any concerns about leveraged or inverse fund investments in your portfolio, please contact the Law Office of Scott Lane for a no-cost and no-obligation evaluation of your investments. You may have a viable claim for recovery of your investment losses by filing an arbitration claim with FINRA.

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