The SEC recently released an Investor Bulletin on ETFs (PDF) which provides background information about ETFs in general and defines several terms which may be confusing to investors. ETFs can be complex and risky investments, as they allow nearly anyone to purchase portfolios which would typically only be suitable for sophisticated investors or traders.
Some commentators were not satisfied with the Bulletin, particularly its lack of new guidelines related to leveraged and inverse products. Paul Baiocchi at IndexUniverse says of the Bulletin, "too bad it was about five years too late," highlighting that FINRA and the SEC released a very similar report almost three years ago.
Well, this toothless bulletin does little to address the concerns facing any of the remaining unknowing investors who may still have access to these funds through their discount brokerage.
Without creating real ETF “gates” as my colleague Dave Nadig made the case for back in March, the SEC is just spinning its wheels, and seemingly covering its tracks without offering any new insight on the problem.We've talked a lot on this blog about the risks of leveraged and inverse ETFs, and have several ongoing research projects on the subject. We agree that the SEC's Bulletin does not fully address the apparent misunderstanding that many investors have related to how these ETFs rebalance their exposure. In addition, the Bulletin does not address the risks of ETNs, which bear certain resemblances to ETFs but are in fact structured very differently, nor does it address certain commodities ETFs which also have unique and easily misunderstood features.
If the SEC were serious about preventing the types of losses experienced back in 2008 which rightfully opened up the discussion of tighter regulations on inverse and leveraged funds nearly half a decade ago, it would have outlined real solutions, and not just regurgitated FINRA’s three-year-old warnings.
However, the SEC's Bulletin will likely be an informative reference for ETF investors in general. The Bulletin at least clearly states that there are issues related to leveraged and inverse ETFs that investors should be aware of, and gives a variety of useful background material that is relevant for nearly all ETF products. We agree that new guidelines would likely go a long way in preventing further investor harm, but having a resource such as the Bulletin that covers the basics of ETF investing can also be useful.