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EFT Alert:
September 24, 2009
The Securities and Exchange Commission (SEC) and FINRA,
the organizations which regulate the financial
securities industry, have issued an Investor Alert
advising retail investors of the risks associated with
leveraged and inverse ETFs. Specifically, they warn that
these instruments tend to deviate from – and may
underperform relative to – their benchmarks for periods
longer than one trading day by design.
These deviations may be substantial for longer periods.
What are leveraged ETFs?
Leveraged ETFs are securities that attempt to
replicate multiples of the performance of an underlying
financial index. Inverse ETFs are designed to replicate
the opposite direction of these same indices, often at a
multiple. These ETFs often use a combination of futures,
swaps,
short sales, and other derivatives to achieve
these objectives.
Why don’t they track their indices well over longer
periods of time?
Most leveraged and inverse ETFs are designed to achieve
these results on a daily basis only. This means that
over periods longer than a trading day, the value of
these ETFs can and usually do deviate from the
performance of the index they are designed to track.
Over longer periods of time or in situations of high
volatility, these deviations can be substantial.
What you should know
Stockhere.com recommends that all members
carefully evaluate leveraged and inverse ETFs by looking
closely at their prospectuses and considering their own
financial goals and risk tolerance before trading these
securities. Buy-and-hold investors should be
particularly cautious when evaluating these investments,
because they may not track their underlying indices over
longer periods of time and may have additional risks
inherent to the nature of their underlying assets. Even
experienced retail investors should reflect carefully
before retaining these securities longer than one
trading day.
For more information, see the SEC/FINRA Investor Alert
here:
http://www.sec.gov/investor/pubs/leveragedetfs-alert.htm
Comments about my trades and ideas, send me an
email
stockhere@yahoo.com
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