| 27 July 2009

We first reported the danger of leveraged ETFs last week when we noted that Edward Jones deemed the securities "too dangerous" for their clients. Since then, we learned that both LPL Investment Holdings and Ameriprise have also decided to stop selling the funds. The reports come on the heels of FINRA's shot across the bow, deeming the investments "not suitable for retail investors."

Meanwhile, Direxion Funds, one of the bigger players in the space with products like the Financial Bear 3X (FAZ), is lobbying hard to get the firms to reconsider their position before the funds become just another "toxic" asset.

But the plot thickens. Today we see reports from Bloomberg that the U.S. Natural Gas Fund ETF (UNG), the largest natural gas fund, has decided to shift its strategy. Apparently they reached their "investing limits" in the main markets for fuel and gas, so last week they bought $250 million in an "off-market" swap.

You might recall that earlier we reported that this type of shift in strategy is what ultimately blew up Schwab's YieldPlus fund.

Also today we find reports from FT AlphaVille that UBS has decided to suspend all purchases of leveraged ETFs. Part of the statement issued to clients reads as follows: "UBS Wealth Management Americas has suspended purchases of leveraged and inverse ETFs to our clients, effective immediately, as the short-term nature of these securities is generally inconsistent with the long-term view of investing that UBS advocates when building client portfolios."

While it's too early to call for a complete meltdown of one of the most widely traded types of securities in the markets today, these latest events certainly call into question the viability of the funds and will force the hands of regulators and intermediaries alike. We'll keep an eye on the updates for you.