Investors bullied out of leveraged ETFs at exactly the wrong time

Saturday's Wall Street Journal has an article titled "Investors Pull $2.1 Billion out of Leveraged ETFs." What's going on?

The article says assets in ETFs increased by $20.1 billion in August but declined in only two asset classes: leveraged and inverse ETFs.

The article goes on to discuss how the Securities and Exchange Commission and the Financial Industry Regulatory Authority have issued warnings that leveraged ETFs may not be suitable for all investors. These warnings have been especially targeted at retail investors.

The SEC and FINRA, however, aren't the only ones pointing fingers at leveraged ETFs. Let's see how many ambulance chasers have initiated class action lawsuits against the ProShares company:

• Gilman and Pastor LLP Files Class Action Lawsuit Against ProShares' UltraShort MSCI Emerging Markets ProShares Fund on Behalf of UltraShort Fund Investors
• Labaton Sucharow LLP Files Class Action Lawsuit Against ProShares' UltraShort Real Estate ProShares Fund -- SRS
• Law Offices of Howard G. Smith Announces Class Action Lawsuit Against Proshares’ UltraShort Financials ProShares Fund
• Law Offices of Howard G. Smith Announces Class Action Lawsuit Against ProShares' UltraShort Real Estate ProShares Fund.
• Shalov Stone Bonner & Rocco LLP Announces Class Action Against ProShares' UltraShort MSCI Emerging Markets Fund - EEV
• BERNSTEIN LIEBHARD LLP FILES CLASS ACTION LAWSUIT ON BEHALF OF INVESTORS IN PROSHARES ULTRASHORT REAL ESTATE PROSHARES FUND (SYMBOL: SRS)

This list is the result of a quick search on Google and doesn't include any litigation against the folks who bring you the Direxion 3X leveraged ETFs. There are probably more lawsuits in the works out there.

With lawyers and government agencies ganging up on the providers of leveraged ETFs it's no wonder that many investors are pulling back from using these funds.

Unfortunately, this has been exactly the wrong time. As we discussed in earlier posts (here, here and here), 2X leveraged ETFs work quite well in strongly trending markets. Since the March lows, we have indeed had strongly trending markets in the bullish direction and the benefits have accrued to almost every sector. This scenario is the best time to be in leveraged long ETFs yet the frenzy around the warnings and lawsuits has driven many investors away from these vehicles.

As we have written before (here and here), taking a few simple precautions and riding a trend can lead to superior results using the 2X leveraged ETFs. It is unfortunate that "educating investors" doesn't extend beyond scare tactics.

Dislosure: long ROM and USD