Understanding Leveraged ETFs
Comment of the Day

March 18 2010

Commentary by Eoin Treacy

Understanding Leveraged ETFs

This educative article by Ron Rowland for Money and Markets may be of interest to subscribers. Here is a section
Leveraged ETFs are mainly intended for short-term trading. And by short-term, I mean a few days at most. Stick around any longer and the results will start to vary wildly.

Market regulators are starting to realize this. Just last month, the Financial Industry Regulatory Authority, or FINRA, warned brokers that leveraged ETFs are too risky for investors who intend to hold for more than one day. Unfortunately, most stock brokers don't understand how leverage works, either.

On the other hand, if you're a day trader - someone who watches the market minute-by-minute and closes out your positions every evening - then leveraged ETFs can be a great tool.

They can also be useful over longer periods if you know what to expect and watch your ETFs like a hawk, or if you have someone trustworthy watching them for you.

The sponsors of these ETFs are doing their best to educate investors, but it's hard to get the message out. Here are links where you can get information: DirexionShares, ProShares, and RydexShares. I highly recommend you take some time to educate yourself on these ETFs before you use them on your own.

Eoin Treacy's view If the financial crisis has taught us anything, it is that investors don't pay enough attention to an instrument's prospectus. Doing one's due diligence is particularly important given the increased range of products on offer and the complexity associated with leveraged funds.

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