The ETF Gloves Are Off

[Joanne98]

Bearish bets made impossible, compliments of UBS. Either that, or UBS' recently upgraded (with i7 chips of course) computers just cant handle the basis calculations. Either way, is something very fried with ETFs going on behind the scenes?

IMPORTANT NOTICE: Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds are no longer available for new or additional purchases at UBS

Effective July 27, 2009, UBS is suspending the offering of Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds (ETFs). You will no longer be able to make new or additional purchases and will only be able to liquidate current positions through UBS at this time. Any attempt to execute a trade of such ETFs will be rejected.

Please contact your Financial Advisor with questions.

Hopefully iShares and Direxion have some good class action defense lawyers.



http://www.zerohedge.com/article/etf-gloves-are

I wonder what this means?

[natrat]

1. the boys are gettin ready for the big dump this fall and don't want you in on it

[MellowOne]

2. Would you explain further?

I trade ETF's should I hold or sell?

[girl gone mad]

10. You shouldn't take advice from strangers on the internet..

but leveraged ETF's are not designed to be held. Most of the traders I know who used them close out their positions daily.

ETA: I should have read the whole thread, this is covered below. sorry!

[pa28]

3. Their prices don't seem to behave correctly.

I have noticed that leveraged etf's even though they seem to track well enough in the short term all tend to decay in value over time. Even Direxion said their own funds should not be used for buy and hold purposes (also interesting was FAZ and FAS both having reverse splits recently.)

Hopefully somebody who really understands the problem here will chime in.

[Joanne98]

6. Yeah I was thinking that too.

[pa28]

9. Bespoke did an analysis of this today.

http://bespokeinvest.typepad.com/bespoke/2009/07/leveraged-etf-ban-spreading-like-the-flu.html

worth a look.

[notesdev]

4. Setting up a scapegoat for the imminent crash

The bottom is due to fall out of this market pretty soon, and someone needs to be blamed. Who better than those who take short positions? If you can't squeeze 'em, demonize 'em.

[A HERETIC I AM]

5. UBS is following the lead of Edward Jones, LPL Financial and Ameriprise.

They are suspending the sale of these securities because they are contrary to the firms investment policies for clients. They see them as too risky for a "buy and hold" investor and as such, do not want to offer them. Another likely reason is a fear of lawsuits resulting from losses. These types of ETF's are not for inexperienced or novice investors, carry unusual risks and are not designed to be held for extended periods. FINRA warned brokerages early in June about them. They are fine for those that understand them and are willing to closely monitor and day-trade them, but apparently not for UBS's core business.

A Google search using "Banned leveraged ETF sales" gave numerous articles explaining the why;

Bloomberg has a short piece on this issue today.

Here is the FINRA Regulatory Notice issued in June. (.pdf)

Contrary to the linked bloggers point about "bearish bets", the ETF's UBS has suspended include both those that take long positions (bullish) and those that take shorts (bearish). The primary issue FINRA is pointing out appears to be the leverage used by the manager of the ETF and the fact that many of these issues are designed to give their stated results (200 times the index for example) on a daily basis. The fact that many of them reset daily means that even though the index may rise over the course of weeks, the fund may not.

[Joanne98]

7. Thanks Heretic!

:hi:

[MellowOne]

8. I swing trade them

And your correct, the fund doesn't always gain or lose like it was designed to do. But I make money by watching them closely. Thanks for the info.

[On the Road]

11. May Not Mean Much of Anything

There are lots of firms now offering similar products. There are even industry ultrashort funds (DUG Oil, SRS Real Estate, SSG Semiconductors, RXD Health Care) and international funds (EEV Europe, EVW Japan, BZQ Brazil, SMK Mexico),

I generally use ProShares' QID (2 X NASDAQ inverse) for shorting the market. Never the whole account, and always only for short periods. Mixed results, but it's hard to beat the pros.

One advantage for the individual investor is that buys take several days to officially close. So if you buy and sell the same day, you're locked out for unless you have a trading account with leverage.