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Beware: Improper Use of Direxion 3X ETFs

Fitapelli Kurta is investigating customer complaints related to losses in inverse, leveraged Direxion 3X ETFs. Direxion 3X ETFs are highly complex securities, which are often misunderstood by the brokers who recommend them to customers. Our law firm is interested in speaking to clients who suffered losses investing in Direxion 3X ETFs at the recommendation of their broker or financial advisor.

ETFs are similar to mutual funds in that they pool investor money in order to invest in a larger class of assets. In its simplest form, ETFs are designed to track and correlate to an index or a class of assets (i.e. all bank stocks). However, unlike mutual funds ETFs are traded throughout the day on exchanges, where their prices change like stocks. Companies like, Direxion, package and create ETFs for the general public.

ETFs have evolved over the years to become much more complex. Specifically, there are now ETFs known as “inverse ETFs,” which track the inverse of an index. The goal of these products is to increase as the index it tracks decreases. Another newer type of ETF is a “leveraged ETF.” Leveraged ETFs also track a particular index, but use leverage to multiply results. Thus, a 2x leverage ETF would track an index and its increases or decreases would be double that of the index.

Direxion 3X offers many different types of inverse and leveraged ETFs. While these products are important tools for a client’s portfolio, there is a possibility that the incorrect use of these products will lead to disastrous results.

Leveraged and inverse ETFs that are offered by Direxion 3X reset daily. This means that Direxion 3X leveraged, inverse ETFS achieve their performance only a daily basis. Holding a Direxion 3X ETF for a period of longer than one day will result in the ETF deviating from the index that it seeks to track. As the Direxion 3X ETF’s prospectus warn, after periods of one day returns may no longer be correlated to the index. The longer the Direxion 3X ETF is held, the larger the deviation.

Similar, the Financial Industry Regulatory Authority, or FINRA as well as the Securities and Exchange Commission, or SEC, also warn that investors should not hold inverse, leveraged ETFs for period of longer than one day.

Often financial advisors and stock brokers recommend the purchase of Direxion 3X ETFs to “hedge” against market fluctuations. If these brokers hold Direxion 3X ETFs for periods of longer than one day, then this “strategy” becomes meaningless. This is because the returns that are achieved by holding Direxion 3X ETFs for long periods of time are non-correlative. This means that they will not correlate or track any index. Simply stated, holding Direxion 3X ETFs for extended periods of time is reckless and demonstrates a fundamental lack of knowledge regarding the product.

The Financial Industry Regulatory Authority, or FINRA, has fined and censured multiple brokerage firms for recommending inverse, leveraged ETFs to customers without fully understanding the risks. Most notably, in 2012, FINRA fined Citigroup Global Markets, Inc., Morgan Stanley & Co., LLC, UBS Financial Services and Wells Fargo Advisors, LLC a total of more than $9.1 million.

If you or someone you know lost money investing in any Direxion 3X ETFs, those losses may be recoverable. Please contact us today for a free consultation.