MA Regulators Looking at Leveraged ETFs

July 15, 2009 ( - Massachusetts securities regulators said they have launched an inquiry into the sales practices of leveraged exchange traded funds.

The Boston Globe reports that Secretary of State William F. Galvin’s office sent letters to three of the firms most active in creating the funds: Rydex Investments, Direxion Funds, and ProShares. Galvin’s office said the funds have important limitations that should be included in marketing materials.

The newspaper explained that leveraged ETFs, like other index funds, are designed to track an underlying index, such as the S&P 500, but are designed to use options or borrow money to amplify the returns for investors. So when the market rises, investors could earn double or triple what they would in a conventional index fund, but when the market falls, they could lose just as much. The funds are becoming increasingly popular.

According to the news report, specifically, Galvin’s office noted that because the leveraged ETFs are reset each day, the long-term returns often differ significantly from the underlying index. The office also noted the funds generally incur greater trading fees than traditional ETFs, which can reduce the gains for investors.

“It is important that retail investors be provided with all the information necessary to make informed choices about these products,” Galvin said in a statement, according to the Globe. “That is why the Securities Division of this office plans to conduct a review of the sales materials which are provided to Massachusetts investors and further assess the compliance procedures and supervision of Massachusetts broker-dealers offering these securities to retail investors.”