For unwary investors, ETFs or exchange-traded funds, can substantially increase the risk of their portfolios. ETFs came onto the scene in 1993, and they were originally designed for investors who wanted to invest in an index like the Standard & Poor’s 500. However, since then, some ETFs use borrowed money, or leverage, in the attempt of doubling or tripling the index. This practice significantly increases the downside for investors when the market goes down.
We have recently seen cases in which money managers have placed improper ETFs in portfolios of seniors. When that occurs, those seniors may have viable claims for financial elder abuse as well as other fraud and suitability claims. At times, an argument can be made that ETFs are appropriate because they have low management fees and permit investors to choose when they want to generate a capital gain by selling the investment. However, when a money manager recommends an ETF, the investor should critically consider the type of ETF involved and whether it is a leveraged fund.
Currently, with $1.4 trillion in ETFs worldwide ($954 billion in US based funds), more and more managers are recommending the use of ETFs. Critics of ETFs also argue that ETFs are causing stock price correlation, the tendency of large sectors of the market to surge and drop in a short period of time. The Securities and Exchange Commission (SEC) has launched a “general review” of the ETF industry and is focusing on whether or not investors are receiving proper disclosures of the risks they are taking.
We at Heimanson & Wolf represent investors who have been the victims of investment fraud and abuse.