Back in 2009, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada) lobbied for heightened disclosures of the intricacies ehind leveraged ETFs. They did not propose an outright banning of these products; they simply wanted to make sure that the right people were using them.
I recall having a conversation with a gentleman who worked for a leveraged ETF provider, and that conversation struck a chord. He questioned why the same scrutiny wasn't being placed on penny stocks.
The possible range of returns on investment with a leveraged ETF are equally attainable with a penny stock. In fact, while a leveraged ETF, if held for an extended period of time, can lose a substantial amount of your original investment, you are more likely to lose all your capital with a penny stock. Conversely, there have been penny stocks that have quickly rewarded investors with thousandfold returns. Penny stocks can be significantly more risky than a leveraged ETF. But remember, taking on risk can be rewarded, not just punished.
I can recall more cases where an investor has been burned by getting into a penny stock than a leveraged ETF, but I don't have a problem with either investment.
If an investor purchased a leveraged ETF without understanding that the goal is simply to track a daily index return, and then gets caught out by volatility-induced decay, they'll figure it out eventually. Perhaps then they'll go back and read all the literature they were supposed to read in the first place.
A penny stock investor may never get a wake-up call, perhaps because it's a much simpler story. A company wants to raise money, so they issue stock. It could go bust, or it could go to the moon. There's nothing wrong with that. I own penny stocks. In fact, I own leveraged ETFs too.
Sometimes I scratch my head when I think of how little time some investors spend researching what they are buying. Actually, "investor" is probably the wrong word. It's more akin to gambling if your strategy is based around the school of shiny ball management, where your attention can change between investment candidates based on what's in front of your face right now. Couple that with a buy-and-hope strategy and you are a gambler, not an investor.
Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is wheredoesallmymoneygo.com.
Preet Banerjee