Skip to main content

Restricting access to leveraged ETFs, are brokerages outlawing products or strategies?

As more brokerages prevent their customers (read: individual investors) from trading leveraged ETFs, I am moved to question the motivation of these firms.

Thus far, we have UBS, Edward Jones, LPL Financial and Ameriprise Financial all banning trading of ETFs from ProShares and Direxion. Moreover, the Massachusetts chief financial regulator has announced an investigation of leveraged ETFs.

Further stirring the pot, FINRA issued a warning that these ETFs are not suitable for investors who hold them for longer than one day. If they are held longer than a day they would only be appropriate if "closely monitored by a financial professional."

The evidence against leveraged ETFs --

The beef against these ETFs is that you can get the call on a sector or index correct and still lose money. The examples used over and over again are the ProShares UltraShort Financial ETF (SKF) and the ProShares UltraShort Real Estate ETF (SRS). Despite the financial and real estate sectors taking a dive in 2008, an investor who held these ETFs for the entire year would have lost money rather than achieving a comfortable gain.

Then there are the 3X ETFs from Direxion. The products do indeed exhibit some extreme behavior and are probably best suited for very brief trades.

The implications --

The defenders of leveraged ETFs are many. Their main argument is that an appropriate strategy is necessary in order to make money with these ETFs. Sure, they work for day traders and swing traders but the evidence also exists that when a solid trend is underway and volatility is moderate to low, the 2X ETFs can easily be held for weeks or months; ie, as long as the trend is in force. And the profits under such conditions can be substantial. (In fact, those conditions are prevalent in the market right now.)

Uh oh. Trend followers are essentially the same as market timers. It is a generally accepted truth among financial advisors that market timing isn't appropriate for individual investors. Or is it?

Has there ever been a brokerage that discouraged market timers or day traders? Right or wrong, market timers and day traders generate commissions and commissions are the lifeblood of a brokerage.

So brokerages attack leveraged ETFs with a big dose of hypocrisy. If I am a lousy market timer, it’s OK to squander my funds on stocks, options or standard ETFs but it's not OK to lose my money on leveraged ETFs.

Are brokerages banning day trading or market timing? Never happen. Even though there is plenty of evidence that many individual investors are not particularly adept at these trading strategies.

Will brokerages ban leveraged ETFs to make it look like they actually have the best interests of investors in mind? After more than a year where so many financial advisors failed to help investors avoid steep losses, this move is a cynical attempt to detract investor attention from the fact that brokerages did little or nothing to guide or protect investors during the worst market downturn in decades. This is hypocrisy, not protection for investors.

As 2-Pac used to say: "In a position to make a difference, politicians and hypocrites they don't wanna listen."

Disclosure: long ROM,USD and UYG


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what