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Investments - Unsuitable

Non-Traditional ETFs: A Firefighter Gets Hosed

November 11, 2019

by Howard Haykin


A contract firefighter saved up $500,000 by working overseas. Seeking a greater return on his money than he would otherwise earn in a savings account - and without putting his principal in danger - the firefighter transferred $390,000 into a brokerage account with EDI Financial. The broker invested most of the firefighter's money in Leveraged and Inverse Leveraged Exchange-Traded Funds (ETFs) – aka “Non-Traditional ETFs” – and held those investments on average for at least 150 days; some ETFs were held for 600 days. OVERALL, THE CUSTOMER LOST $213,000, WHILE THE BROKER MADE $43,000 IN COMMISSIONS.  



WHAT’S WRONG WITH THIS PICTURE?    Many investors are familiar with the properties of typical ETFs that usually track and try to emulate the return of a benchmark index (e.g., S&P 500), a market sector (e.g., financial stocks), or a type of security (e.g., gold). By contrast, Leveraged ETFs seek to deliver 2 or 3 times the returns on an index or benchmark by using derivatives and debt (leverage). Inverse ETFs seek to return the opposite of the index or benchmark performance. Finally, Leveraged Inverse ETFs (or ‘Ultra-short Funds’) seeks to combine qualities from both categories of ETFs.


The broker, despite having 30 years’ experience, clearly did not sufficiently understand the risks and features associated with Non-Traditional ETFs,  and therefore failed to have a reasonable basis for buying these securities in the firefighter's account. Among other things, he failed to consider these concerns: 


  • They’re intended for use within a complex investment strategy when monitored closely by a financial professional.
  • They’re designed to be held for a single day or a short-term period, and not for intermediate or long-term periods - which is a common strategy for retail customers.
  • Their price is reset daily, which has the effect of compounding. As a result, over longer timeframes the results can differ significantly from their objective.
  • They can deliver extremely volatile returns due, in large part, to leveraging.



A WORD TO THE WISE.    Customers should avoid or move away from any broker who recommends or purchases Non-Traditional ETFs for an account. Instead, welcome recommendations to invest in typical ETFs which, like mutual funds, can afford investors a relatively safe way to diversify one’s portfolio. For example, an investment in the ETF “SPY” enables an investor to track the returns of all 500 large companies in the Standard & Poor’s (S&P) 500 Index.



[For further details on this case, click on … FINRA Case # 2016048867401.]