At a time when too much debt on the part of everyone from homeowners to hedge funds brought the world financial system to the brink, you'd think "leverage" would be a four-letter word. But if the explosive growth of leveraged exchange-traded funds is any indication, it seems like investors just can't get their hands on enough money in order to boost returns.
True, leveraged ETFs offer a cheap, liquid and transparent way to double- or even triple-down on the movements of their underlying indexes — both long and short — but they are unsuitable or even dangerous if you don't understand the product. Unfortunately, most regular folks just don't.
"For the most part leveraged ETFs are completely inappropriate vehicles for individuals," says Maury Fertig, partner at Relative Value Partners, an independent investment advisor in Northbrook, Ill. "They have to be constantly evaluated. It's a lot more work and risk. And just knowing how most individuals manage their money, why do it? You have to babysit the thing."