Leveraged ETFs May Not Be For You, But They’re Not A ‘Scam’ Or ‘Scheme’

scamIt was no surprise that “Ponzi schemes” or “bullion and currency scams” were on the North American Securities Administrators Association list of the year’s “top 10 investor traps.”

But amid the usual suspects of unregistered securities and flat-out rip-offs cited last week, the state securities regulators included “leveraged ETFs,” noting that these newfangled exchange-traded funds have “been offered to individual investors who may not be aware of the risks these funds carry.  . . .  Given their volatility, these funds typically are not suitable for most retail investors,” Charles Jaffe Reports From The Star Telegram.

Ironically, what was proven in this exercise is that it’s not just investors who don’t fully understand leveraged ETFs, it’s regulators too.  Worse yet, by lumping a clearly legitimate investment with a bunch of scams and frauds, regulators missed the real issues with the products, as well as a chance to fix the problems and properly educate the public. “There’s nothing inherently wrong with leveraged products,” said Scott Burns, director of ETF analysis at Morningstar Inc. “There is something wrong with misusing them, whether you are a self-deluded investor or a misinformed adviser, but the funds have their own uses, and they don’t belong on a list with scams. That’s a mismatch.”

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