U.S. securities regulators warned investors on Tuesday that leveraged exchange-traded funds could lead to big losses even if the market index or benchmark they track shows a gain.
The warning by the U.S. Securities and Exchange Commission on leveraged ETFs follows similar statements from the financial industry and the secretary of state in Massachusetts, who is known for being outspoken on securities issues.
The funds have drawn scrutiny because they can yield big losses for investors over time in choppy markets. In an alert to investors issued on Tuesday the SEC urged investors to carefully consider the details of these funds.
It is possible you could suffer significant losses even if the long-term performance of the (underlying) index showed a gain, the SEC said.
The leveraged funds use techniques such as swaps or options aiming to amplify the one-day returns of their target index.
Some inverse or short leveraged ETFs bet on declines in their underlying index. But in volatile markets such as those of recent months these features can quickly compound losses.
The SEC's alert was issued jointly with the industry's self-regulating body, the Financial Industry Regulatory Authority.
In July Finra warned brokers they should closely supervise sales of the instruments, many of which it called typically unsuitable for retail investors who plan to hold them more than a day.
Massachusetts Secretary of State William Galvin has subpoenaed information from brokerage firms selling the funds.
An SEC spokesman said the agency would not discuss if it is also investigating the area. Several major brokerage houses have already suspended their sales of the instruments.
ProShares Advisors, a top provider of leveraged and short ETFs, said in a statement that We are very pleased that the SEC and FINRA confirmed that the funds can be suitable to hold for periods longer than one day for a variety of strategies.
ProShares declined to make executives available to elaborate. Its statement seemed to refer to a line by the SEC and FINRA that there may be trading an hedging strategies that justify holding these investments longer than a day.
John Gannon, FINRA's senior vice president, said the authority stands by its previous warnings.
SEC Chairman Mary Schapiro previously headed FINRA, and Tuesday's notice marked the second time the two organizations have issued a joint investor alert, said FINRA's Gannon.
(Reporting by Ross Kerber; Editing by Tim Dobbyn)