Friday, January 22, 2010

The Lawsuits Against Leveraged ETF Are Right

Many lawsuits have been filed against the leveraged ETF industry as they have caused many losses to the vast majority of "investors" who hold these instruments for longer than a day. Examples of lawsuits are Gilman and Pastor .

These lawsuits have a very good reason for existing, in spite of what you might read in other sites. The issuers hide behind the protection of the small print and disclosure clauses in prospectuses. They claim that everything they do is well advertised.

The fact is that they have collectively caused hundreds of billions of losses. Take FAS and FAZ for example, whose losses are tracked live. The losses are higher than the value of the shares that remains in them. Where did this go? Which institutions have been reporting profits lately?

The question of where the lost money goes has never been really answered.

What is worse, is that the industry fights back by releasing studies, and by publications in less reputable blogs, some read by lots of readers. This is scary. Day traders supposedly know what they are doing and wontp bother with these "publications". The target of these publications, who will actually read them, seems likely exactly the mom & pop crowd, who are the ones that buy and hold.

These things can be used strictly for intra-day trading or if you know what the outcome of the markets will be over several days - ahead of time. They are also good for gambling. That is what they are for regular investors, who just hear about them and buy them and forget them. Then they are stuck in a losing instrument, and most don't sell.

Months ago some very popular sites were plagued by people commenting in these ETFs, they were buying and selling them all the time. At every win, they would publicly boast of their wins, reinforcing the cycle, just like gambling at a casino, or with lottery tickets. Luckily, these have for the most part disappeared as the losses piled on. I do not know of a single regular or even sophisticated investors who has made money overall in these instruments. Eventually, everyone learns his or her lessons and moves on. Long-term oriented traders, however, remain invested in the hope of recouping losses.

Shocked, yes.

Stay away like the plague. These things should be banned as "ETFs" that can be bought and held.

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