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Abstract: 

Actively managed ETFs and ETNs that produce leveraged daily returns relative to a specific benchmark or index are becoming more popular, but leveraged products do not accurately track their benchmark or index over long periods of time. Many investors erroneously believed they would do so, however—and some who have sustained losses initiated litigation. Additionally, leveraged products are hedged on a daily basis. As these products grow in size and number, there is concern that such hedging activity could increase volatility in the broader markets. Regulators have attempted to educate investors about leveraged ETFs and ETNs, as well as restrict to whom broker dealers may sell them. The market is currently waiting for the conclusion of an SEC inquiry into leveraged ETFs. In the meantime, inherent differences in the legal classification and structure of ETFs and ETNs, and in the way each product is taxed, make their future uses and roles in the marketplace unclear.

Keywords: ETF; ETN; ETV; leveraged exchange traded product; market volatility; FINRA Regulatory Notice 9-31; FINRA Regulatory Notice 9-53; In re: ProShares Trust Securities; In re: Direxion Shares ETF Trust

Affiliations:  .