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Rating:Three Leveraged ETF Providers are in Galvin's Sights Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, July 16, 2009

Three Leveraged ETF Providers are in Galvin's Sights

News summary by MFWire's editors

Direxion, ProShares and Rydex should watch out: another regulator just joined the "pile on leveraged ETFs" fad. The Boston Herald's Jay Fitzgerald broke the news Wednesdsay that William Galvin, Massachusetts' Secretary of State sent letters to the trio of leveraged ETF providers to find out more about their sales practices.

Galvin called the move an "inquiry" and "review," though he shied away from the term "investigation."

"Three years ago this market was almost nonexistent, and now there are 140 funds," Galvin said, according to the Wall Street Journal's Jennifer Levitz. "We just want to make sure people know what they're getting into."

Andy O'Rourke, senior vice president and marketing director at Direxion, told MFWire that the complexity of leveraged ETFs is exactly why the firm emphasizes education so much around its offerings.

"We're complying with the inquiry," O'Rourke said. "We're in the process of pulling all that information [sales materials, etc.] together for them [Galvin's office]."

Lori Klash Winkler, a spokeswoman for Rydex parent Security Global Investors, said that her firm's disclosure material is "consistent with industry standards and includes the information for investors to make informed decisions."

"We disclose that investors should monitor their leveraged and inverse ETFs' holdings consistent with their strategies, perhaps as frequently as daily," Winkler said in an emailed statement. "As with any investment, investors should have a clear understanding of how these products work and their potential benefits and risks prior to making an investment."

ProShares told the WSJ that they will cooperate with Galvin's inquiry.

Reuters, the Boston Globe and Index Universe also reported on Galvin's announcement.

Galvin's not the first to take an interest in leveraged ETFs (while seemingly ignoring their plain vanilla leveraged index mutual fund brethren). Last month Finra issued a warning to brokers last month, claiming that leveraged ETFs "typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets." Earlier this week Finra followed up on that warning with a podcast (mp3).

Notably, Direxion has already filed to switch the timeframe of 17 of its non-ETF leveraged index funds from daily to monthly. Yet MFWire previously reported that the Newton, Massachusetts-based firm will continue to target its leveraged ETFs to magnify returns on a daily basis. 

Edited by: Neil Anderson, Managing Editor

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