In the investment sphere, an investor would have to pay a steep price for not understanding the eventual outcome. Investors could be misled by financial advisers to buy products with negligible returns.
For e.g., the Financial Industry Regulatory Authority (FINRA) declared penalties of nearly $3 million against Oppenheimer & Co (an investment bank) for selling highly complicated leveraged ETFs to retail customers. According to an internal company policy, the products should not have been sold to the investors.
FINRA as well as the Securities and Exchange Commission have provided investor alerts with regard to leveraged and inverse ETFs. The agencies believe they are extremely risky for retail investors.
Consumers do not understand that these funds either move with or against the market on a daily basis. That results in greater volatility when they are held for a longer period. Technically, it is also known as “tracking error”.
Though a tracking error could be beneficial for an investor, the truth about these kinds of funds is that holding them long-term could result in revenue loss for an investor.
Investors seek yield along with safety. At present, bonds do not deliver enough yield and stocks do not provide sufficient safety. Hence, the broker recommends a complex portfolio that asserts to do both, and the leveraged ETFs are supposed to be part of the portfolio that would generate the return in line with the client’s expectation.
Customers buy and hold an ETF through this process. The greater threat is holding it with the leveraged products, which they would not buy in a single transaction when they choose one fund.
Investors should not allow themselves to be convinced that something they don’t comprehend is right for them. These funds could be perfect for few investors, but not for most other investors. Investors must safeguard their interest and avoid falling for any sales pitch that tells them otherwise.