UBS Brokerage Suspends U.S. Sales of Leveraged ETFs (Update1)
By Charles Stein and Christopher Condon
July 27 (Bloomberg) -- UBS AG’s U.S. brokerage business stopped selling exchange-traded funds that use leverage because the products don’t conform to its emphasis on long-term investing.
UBS Wealth Management Americas suspended sales of inverse and leveraged ETFs immediately, citing the “short-term nature of these securities,” the New York-based brokerage said in a statement today. Edward Jones, a St. Louis-based brokerage, and Minneapolis-based Ameriprise Financial Inc. have also halted leveraged-ETF sales.
The Financial Industry Regulatory Authority and Massachusetts Secretary of the Commonwealth William Galvin said in the past two months that leveraged and inverse ETFs might not be appropriate for individual investors. The funds’ assets have increased 51 percent to $32.8 billion this year, according to data from State Street Corp., a Boston-based company that sells ETFs and tracks the industry.
“We would prefer our products were as broadly available as possible,” Andrew O’Rourke, senior vice president at Direxion Funds in Newton, Massachusetts, said today in a telephone interview. His firm is one of three ETF sponsors that received inquiries from Galvin this month. “We don’t believe there are many advisers making ill-suited recommendations about our funds.”
Exchange-traded funds typically mimic indexes and trade throughout the day like stocks. Leveraged ETFs use swaps or derivatives to amplify the daily returns of an index, while inverse ETFs move in the opposite direction of a benchmark.
Inverse and leveraged ETFs accounted for about 5.5 percent of the $593 billion in U.S.-listed ETF assets at midyear, according to State Street’s data.
Finra told brokers in June that leveraged ETFs might be unsuitable for individual investors who hold them for more than one day. Finra said in an audio statement this month that the funds can be appropriate when held longer than a day if they are “closely monitored by a financial professional.”
Edward Jones, which has 9,900 offices in the U.S., halted sales of leveraged ETFs, Regina DeLuca Imral, a spokeswoman for the company, said in a telephone interview. The stoppage in June was reported earlier by the Wall Street Journal.
“In response to Finra’s recent guidance regarding leveraged and inverse ETFs, we have instructed our advisers to stop soliciting the purchase of these products,” Chris Reese, a spokesman for Ameriprise, said in an e-mailed statement. The company has about 12,000 financial advisers.
LPL Sets Limits
LPL Financial, based in Boston, is limiting the amount of leverage in funds it sells. It won’t sell leveraged ETFs with more than twice the long or short performance of the target index, said Joseph Kuo, a spokesman for the LPL Financial.
The firm came up with the policy because of market volatility, Kuo said in an e-mail.
UBS Wealth Management Americas, a unit of the second- largest Swiss bank by assets, has 8,760 brokers, said Karina Byrne, a spokeswoman for the unit.
The longer investors hold the leveraged ETFs, the further the actual returns can vary from the predicted returns, according to Scott Burns, director of ETF analysis at Morningstar Inc., a Chicago-based firm that tracks the fund industry.
Finra cited the differing returns of the Dow Jones U.S. Oil & Gas Index, which gained 1.6 percent between Dec. 1 and April 30, and the ProShares Ultra Oil & Gas, which seeks to deliver twice the index’s daily return. The fund fell 5.6 percent, including reinvested dividends, in the same period.
Trade Group Appeal
The Investment Company Institute, a Washington-based trade group for mutual funds, asked Finra to clarify its initial statement, urging it to provide guidance “rather than defining such securities as per se unsuitable for certain classes of investors.”
Galvin, Massachusetts’ chief financial regulator, announced a probe of leveraged exchange-traded funds earlier this month, saying he wanted to be sure the products weren’t “being pitched to inappropriate people.”
Galvin sent letters to three firms selling the ETFs: Direxion; ProShares Advisors in Bethesda, Maryland; and Rydex Investments of Rockville, Maryland.
Tucker Hewes, a spokesman for ProShares, said he couldn’t make an immediate comment. A call to Lori Klash Winkler, a spokeswoman for Rydex, wasn’t immediately returned.