Canadian regulators should force providers of leveraged exchange-traded funds (ETFs) to give better disclosure about their risks in their prospectuses and advertising, an investors rights' group urges.
"Retail investors don't understand what the real risks are," said Ermanno Pascutto, executive director of the Fair Canadian Foundation for the Advancement of Investor Rights.
Leveraged ETFs "are not only complicated, but they are pretty dangerous," Mr. Pascutto said after his group yesterday released a nine-page report warning of trading in these securities.
Toronto-based BetaPro Management Inc. is the only provider of leveraged ETFs in Canada. It says its Bull and Bear Plus ETFs aim to give double the daily performance of the indexes that they track.
Fair Canadian wants regulators to require all these kinds of ETFs offered in Canada to file a new prospectus with "bold front-page disclosure in plain English of the risks of holding these products for longer than a few days, particularly in volatile markets."
Print and broadcast advertising should warn: "This product is not suitable for holding periods longer than a few days and is not appropriate for virtually all retail portfolios," the group says.
The problem is that "the magnitude of the return bounces around depending on volatility and direction," Mr. Pascutto said. He was referring to the fact an index needed a consistent direction - as opposed to going up and down in a trading range - for leveraged ETFs to get strong returns.
The report noted the Canadian gold subindex gained 1 per cent for the 12 months ending March 31.
"The HBP S&P/TSX Global Bear Plus ETF did not lose 2 per cent, as its two-times inverse would indicate," the report said. "It actually lost 87 per cent. Its pair, the inverse Global Gold Bull Plus ETF, should have gained 2 per cent. Instead it lost 46 per cent."
Mr. Pascutto said he is not suggesting that these ETFs be banned. "There should be a plain disclosure of the risks - not just listing a whole bunch of risk factors, but to give it to people straight."
BetaPro president Howard Atkinson, however, said he feels his firm's disclosure on its Bull and Bear Plus ETFs is adequate, but has worked on improving the language in recent prospectuses.
And "we have always highlighted disclosure ... that our Bull and Bear Plus ETFs offer exposure to the daily returns of the underlying index" be in the prospectuses or through disclaimers in marketing materials and advertising, Mr. Atkinson maintained. "We believe an informed investor is a better investor."
Leveraged ETFs are suitable for retail investors, Mr. Atkinson argued. "Trading volumes are growing, and I would say the investing public has spoken with their portfolios based on the usage of our products."
About 40 per cent of the HBP ETFs are used by retail investors with 60 per cent of them investing through investment advisers and the rest buying them through discount brokers, he added.
Independent fund analyst Dan Hallett agreed that there is a "need for clear warnings" for investors. "Until these [leveraged] ETFs came out, ETFs were associated with long-term investing and passive investing, and these things are anything but that," he said.
"The information is in both the marketing materials and prospectuses that I have reviewed," but there is room for them to be "more explicit and [in] plainer language," Mr. Hallett said.
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Sample of Horizons BetaPro Bull and Bear ETFs
| FUND | YTD % CHANGE | 1YR % CHANGE |
| HBP 60 Bear + ETF | -28.00% | 17.00% |
| HBP 60 Bull + ETF | 14.90% | -60.60% |
| S&P/TSX 60 Index | 8.70% | -31.50% |
| HBP COMEX Gold Bullion Bear + ETF | -17.10% | -27.40% |
| HBP COMEX Gold Bullion Bull + ETF | 3.50% | -12.70% |
| COMEX Gold Bullion | 0.80% | |
| HBP NYMEX Crude Oil Bear + ETF | -12.70% | 282.10% |
| HBP NYMEX Crude Oil Bull + ETF | -44.20% | -96.20% |
| NYMEX Light Sweet Crude Oil Futures | -73.10% | |
| HBP NYMEX Natural Gas Bear+ETF | 37.00% | 650.30% |
| HBP NYMEX Natural Gas Bull+ETF | -53.90% | -95.70% |
| NYMEX Natural Gas Futures Contract | -74.90% | |
| HBP S&P/TSX Global Mining Bear+ ETF | -42.60% | -38.60% |
| HBP S&P/TSX Global Mining Bull+ ETF | 19.30% | -77.70% |
| S&P/TSX Global Mining | 15.00% | -39.40% |
| As of April 30, 2009 |
