Complex ETF Lawsuit – Brokers May Be Liable for Unsuitable Recommendations Including Inverse and Leveraged ETFs
If your broker recommended you invest in complex, non-traditional, leveraged, or inverse ETFs, you may have a right to bring a claim to recover losses you may have suffered.
Exchange Traded Funds (or ETFs) are designed to perform correlated to or inversely to the benchmark that they are tracking. Non-traditional ETFs are designed to achieve specific performance goals daily. On a daily basis, non-traditional ETFs will “reset.” This characteristic makes non-traditional ETFs unsuitable for a majority of investors. FINRA, the securities regulator, has advised caution in holding these investments for longer periods of time.
Complex and non-traditional ETFs can be an effective method of trading to profit from, or at least hedge exposure to, downward trending or volatile markets. Non-traditional ETFs can be an effective method of trading when closely monitored, however typically non-traditional ETFs are unsuitable for intermediate or long-term investment use. In fact, FINRA called complex and non-traditional ETFs “highly complex financial instruments” and warned that “inverse and leveraged ETFs that reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”
Due to how complex non-traditional ETFs can be, they are often misused by brokers and financial advisors and have come under scrutiny by both FINRA and the SEC. Communications from FINRA and the SEC released in August 2009 alerted members of their sales obligations to their investors when recommending leveraged or inverse ETFs. As an example, FINRA warned:
“For example, between December 1, 2008, and April 30, 2009, a leveraged ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index fell 50 percent, while the underlying index actually gained approximately 8 perfect. A leveraged inverse ETF seeking to deliver three times the inverse of the Russell 1000 Financial Services Index’s daily return declined by 90 perfect over the same period.”
Complex and non-traditional ETFs can pose substantial risks to investors. FINRA reminded brokers and brokerage firms over a decade ago that the recommendation of complex and non-traditional ETFs must be suitable for the client. Further, FINRA reminded brokerage firms that they had numerous obligations including supervisory obligations and training obligations to ensure that brokers and advisors were appropriately selling complex and non-traditional ETFs. When brokers and brokerage firms fail to comply with the FINRA Rules and investors are harmed, the investor may have a legal right to bring a claim to recover the losses.
Examples of non-traditional ETFs that have had losses of approximately 50 percent or higher since January 2020 are:
- Direxion Daily S&P Oil & Gas (GUSH)
- Direxion Daily MSCI Brazil Bull 2X (BRZU)
- Direxion Daily Junior Gold Miners Idx Bull 2X (JNUG)
- Direxion Daily Latin America Bull 2X (LBJ)
- Direxion Daily Gold Miners Index Bull 2X (NUGT)
- Proshares Ultra MSCI Brazil Capped ETF (UBR)
- Proshares Decline of the Retail Store ETF (EMTY)
- Proshares Ultra Oil & Gas (DIG)
Other complex and non-traditional ETFs include:
- ProShares UltraPro Short QQQ (SQQQ)
- Direxion Daily S&P Biotech Bull 3X (LABU)
- ProShares UltraPro Short S&P500 (SPXU)
- ProShares UltraPro Short Dow30 (SDOW)
- Direxion Daily S&P 500 Bear 3X (SPXS)
- Direxion Daily Small Cap Bear 3X (TZA)
- Direxion Daily Financial Bear 3X Shares (FAZ)
- ProShares UltraPro Short Russell 2000 (SRTY)
- Direxion Daily Semiconductor Bear 3X (SOXS)
- Direxion Daily Technology Bear 3X (TECS)
- MicroSectors FANG+ Index 3X Inverse Leveraged ETN (FNGD)
- Direxion Daily Energy Bear 2X (ERY)
- Direxion Daily Real Estate Bear 3X (DRV)
- ProShares UltraPro Short Mid Cap 400 (SMDD)
If you were recommended to invest in any of these complex or non-traditional ETFs or any other similar investments, we may be able to help you recover your losses. The Securities and Business Litigation team at Levin, Papantonio, Rafferty, Proctor, Buchanan, O’Brien, Barr & Mougey, P.A. takes cases from people who have suffered losses because unsuitable non-traditional ETFs. You can contact attorney Michael Bixby directly at Mbixby@levinlaw.com to discuss your potential claim, or fill out an evaluation form or give us a call and we will provide a complimentary review of your potential claim.
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