ETFs hold overlooked risks for investors, regulator says.
One of the fastest-growing and most popular investments on Wall Street is threatening to burn investors unaware of the risks, regulators say.
Getty Images/Comstock Images
Exchange traded funds, mutual fund-like baskets of securities that trade like stocks, possess hidden downsides that could hit unaware investors, the North American Securities Administrators Association cautioned Monday.
The NASAA, an organization of the states' top securities regulators, is
most concerned about two relatively new types of ETFs that are designed to either invest using borrowed money — leveraged ETFs — or to move in the opposite direction of a market or index — inverse ETFs.
STORY: 20 mutual fund all-stars that are good bets for your money
STORY: Some new mutual funds that are worth considering
"These exotic ETFS are beyond the ability of mom and pops to evaluate or hold," saysDavid Massey, president of the NASAA.
The NASAA advisory comes amid soaring popularity of ETFs, which are winning favor with investors because, while they can diversify a portfolio like a mutual fund, they can be bought and sold during the day.
Yet, despite ETFs' popularity, regulators worry investors don't understand the risks. They're hoping to get ahead of future problems by issuing warnings:
•Structure. Many inverse ETFs are marketed to bearish investors as a way to bet against the broad market. Likewise, many leveraged ETFs are sold as ways for investors to take extra-large bets when they're bullish. However, most of these ETFs are adjusted each day, prompting investors to rack up taxable gains, the NASAA says.
•Fees. ETFs are best known for being less costly than mutual funds, but investors often overlook other costs, including the difference between the price they pay to buy the ETFs and the sell price. Additionally, investors may rack up trading commissions if they trade ETFs frequently.
•Risk of closure. Given the jump in the number of ETFs, many will not survive, and investors may find themselves paying redemption fees or having the money tied up while funds are returned.
Closures haven't been a big issue, though, as just one ETF has closed this year, and another six have announced closures, in the universe of 1,280 ETFs and related investments, says Morningstar's Robert Goldsborough.
It's ultimately up to do-it-yourself investors to read the prospectuses on all investments, especially complex ones, says Gary Gastineau of ETF Consultants. "If someone just buys" an ETF and doesn't understand how the leverage works or what investments the ETF owns, they may get "a disappointing result," he says.
No comments:
Post a Comment