By Tom Lydon
The ongoing debate over leveraged exchange traded funds (ETFs) just received two new dissenting voices from the Securites and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The SEC has joined the Financial Industry Regulatory Authority in warning investors about the hazards of leveraged, inverse and leveraged-inverse ETFs, writes David Hoffman for InvestmentNews. Leveraged and inverse ETFs can deviate from the performance of the underlying benchmark over time, and especially so during volatile swings in the market.

The CFTC has pulled back its permission for DB Commodity Services LLC to exceed federal speculative position limits on its ETFs tracking corn, soybeans and Wheat futures. The CFTC has been looking into excessive speculation in the futures markets after the steep climb in commodities, most notably in oil prices last year.

On the trading floor, some brokers have restricted or banned the sale of leveraged and inverse ETFs after Finra’s warnings that inverse and leveraged ETFs are unsuitable for retail investors, especially those who want to buy and hold.

Jim Ross, senior managing director at State Street Global Advisors, has been saying that “not all ETFs are created equal.” Mike Latham, co-head of iShares ETF business, believes that the industry is adequately educating investors without the interference from regulators.

More recently, assets in the aggregate ETFs are rising, but assets offered by leveraged ETFs and ETFs specializing in commodities are dropping. Industry experts think the drop was mainly attributed to the firestorm this section of the ETF industry received in the past few months.

Will this hurt demand in the long-term, though? These and other ETFs are popular with investors of all shapes and sizes, so we’re not talking about small potatoes. As with any product, it’s not always smooth sailing. But if there’s demand for these ETFs, then the financial industry will work to satisfy that demand. It may take sitting down with regulators to come up with an understanding.
Max Chen contributed to this article. (Courtesy: ETF Trends)

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