UBS and now, Morgan Stanley Smith Barney are considering suspending trading in leveraged ETFs, and Charles Schwab is urging investors to proceed with extreme caution, Yahoo Tech Ticker reports. The problem with these things is the math. Once you get past a few days, the gap between the leveraged ETF and the underlying index starts to widen. Its appears these innovations may only be suitable for very short term exposure, day trades and/or day-to-day portfolio insurance.
In some cases, investors who sought to use "bear" or "short" leveraged ETFs to protect their portfolios during downdrafts, found themselves losing nearly as much money as the underlying long positions, when they extended their holding periods to longer than two days, and this has left the dealers exposed to liability and in hot water as a result of the misuse and misunderstanding of these sophisticated instruments.
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Source: Tech Ticker - August 14, 2009, Mind the Gap: The Problem with Leveraged ETFs
