Our securities fraud blog has previously addressed the risks to investors regarding inverse and leveraged ETFs. A new type of ETF has emerged, however, which can carry even higher risks. The North American Securities Administrators Association recently issued an advisory to investors regarding single stock ETFs. Inverse and leveraged single stock ETFs are complex instruments which attempt to multiply the returns of a single stock when it goes up (leveraged) or down (inverse).
These investments obviously carry higher risks than if an investor just invests in a single stock, and can include similar risks to using margin to purchase more shares of a stock than you can afford with cash, or risk shorting a stock in the hope that the price declines. Additionally, similar to inverse and leveraged ETFs that are spread over a sector of stocks, these ETFs reset daily, so if they are held for more than a day the price of the ETF can diverge significantly from the price of the underlying stock.
Financial advisors should not be recommending or purchasing these types of ETFs for retail investors unless the investor understands the risks involved and can afford to take those risks. Such a recommendation should be suitable and in the best interest of the customer. If you have lost monies in a single stock ETF that you did not understand or that was not suitable for your risk tolerance, please contact W. Scott Greco for a free attorney consultation about your potential case.