Wednesday, March 9, 2011

Misuse of leveraged and inverse ETFs by financial advisors

Registered Rep reports that financial advisors have been misusing complex and highly risky leveraged ETFs for their unsophisticated clients:

"The problem is, while inverse/leveraged funds are appropriate for some sophisticated investors in small doses, they have been sold more aggressively in some cases. Inverse/leveraged funds are best for institutional or high-net-worth investors who want to hedge exposure and protect against short-term market issues, says David Kathman, senior mutual fund analyst with Morningstar. Allocations should be no more than about 5 percent, he added. 'Even then, I would hope they would be cautious because these types of things can turn on a dime.'”


Registered Rep notes however, that advisors have been putting up to 30% of unsophisticated clients' assets in these unsuitable vehicles. The article warns that people should "[e]xpect a wave of claims this year against financial advisors and broker/dealers who recommended certain Direxion, Rydex and ProFunds leveraged and inverse funds, last year's worst performing mutual funds, say securities attorneys."

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