Securities trending up
© Wang Song / 123RF Stock Photo

U.S. regulators are warning investors about the expected launch of new leveraged or inverse single-stock exchange-traded funds that may pose added risks to investors.

In a statement, Lori Schock, the director of the Office of Investor Education and Advocacy at the U.S. Securities and Exchange Commission (SEC), issued a warning to investors about these new ETFs.

“Because levered single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” Schock said.

Additionally, the focus on a single stock forgoes the benefits of diversification, and levered/inverse ETFs are intended to generate returns over extremely short time periods, the warning noted.

Separately, SEC commissioner Caroline Crenshaw issued a statement warning about the investor protection risks of single-stock ETFs.

Crenshaw warned that it would be “challenging” for an advisor to recommend these products while also meeting their obligations under best interest or fiduciary standards but that retail investors may buy these products through self-directed accounts.

Given the investor protection concerns, she called for the SEC to consider regulatory action to address the added risks of complex products generally and single-stock ETFs in particular.

“As with other complex exchange-traded products, single-stock ETFs may be useful to certain investors who understand their unique features. However, they are risky products for investors and potentially for the markets, as well,” she said.