| 04 August 2009

Fidelity Investments became the latest firm to warn its account holders that leveraged and inverse ETFs may not be suitable for all clients. The warning, posted on its site, suggests that such ETFs are, "designed for sophisticated investors who actively managing their portfolios on a daily basis."

In similar fashion, Charles Schwab (SCHW) warned its account holders last week to "proceed with extreme caution."

Both Schwab and Fidelity continue to offer the products to anyone willing to buy them. Other firms have chosen to stop offering leveraged and inverse ETFs entirely. Those firms include UBS Wealth Management (UBS), Ameriprise Financial (AMP), LPL Holdings and Edward Jones. It issue is the matter of suitability. Firms that typically sell financial products to their customers are worried that the products may be sold to customers that don't understand them or for whom they are not appropriate.

The Financial Industry Regulatory Authority (FINRA) came out with a strong warning for brokers who sell leveraged ETFs, which it later revised after it was pressured by Direxion Funds, one of the largest leveraged ETF providers.

Leveraged ETFs have come under fire because their performance doesn't necessarily mirror their underlying index. This distinction, however, is not always understood by the buyers. Fidelity explains in their statement, "An investor in a 2x Leveraged fund that tracks a stock market index (such as the S&P 500®) should not expect his or her returns over one month to be 20% if the S&P 500 increases 10% over that same period of time."

Morgan Stanley Smith Barney, which is a joint venture between Morgan Stanley (MS) and Citigroup (C), is still deciding whether to continue to sell the products.