Beware of Investing in Exchange Traded Funds (ETF)

According to an article by Liz Skinner of Investment News, investors don’t know what exchange traded funds (ETF) are and have avoided them in their portfolios. Most feel like they are just another complicated investment among the litany of other new products out there. That said, over $900 billion of ETF had been purchased by the Fall of 2010, with anticipated growth in the double digits every year for the next five years, according to the Investment Company Institute.

There is reason for caution when considering investing in exchange traded funds (ETF). Some exotic ETF, such as leveraged and commodities ETF, often contain complex derivatives of assets rather than the assets to which they are purportedly linked. Consequently, these ETF do not track those assets as closely as investors may have been led to expect. Leveraged ETF are usually characterized by high volatility, high risk and designed more for day trading, making them unsuitable for the typical buy and hold investors.

According to Morningstar, all 52 leveraged ETF in existence since January 1, 2008 have lost money, with some 140 ETF shutting down, as reported in the Wall Street Journal. When the ETF closes, shareholders can be strapped with commissions and fees for a new investment to replace the closed fund, in addition to paying capital gains on shares worth more than they cost.

If you have suffered losses in ETF, please contact our securities law firm for a confidential, no obligation consultation at 1-800-259-9010.

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