We didn't hear much about commodity leveraged exchanges traded funds (ETFs) when the gold and silver bubble were inflating. But now that we're seeing a big deflation (when it comes to silver anyway), we're hearing a bit more about the general value of leveraged ETFs as an investing vehicle. 

One esteemed columnist at Reuters has suggested that the SEC needs to investigate some of these vehicles and the marketing surrounding them. 

Recall that some leveraged ETFs seek to double (or more) the daily performance of a commodity price. Unsurprisingly, silver leveraged ETFs have taken a thumping recently. Short leveraged silver ETFs, meanwhile, have fared quite well. The big debate is whether funds that seek enhanced returns on a daily basis are being mistaken for leveraged ETFs that seek enhanced returns over a longer time frame, say a month, or even a year.

For those end customers in a daily leveraged ETF, the results will likely be shockingly bad, as these funds are essentially reset at the end of every day. Funds that seek to double the daily move in a commodity's price likely deliver performance that is anything but 2x over longer time spans. 

Is this a big issue? 

Sadly, there may be many investors in this boat. Reuters raises this example: "the ProShares UltraShort 20+ Year US Treasury fund, is an ETF which returns double the daily decline in an index linked to long-dated government bonds. There are 173 million shares of TBT outstanding, which at a price of $35.65 apiece, means that more than $6 billion is tied up in TBT shares. But average daily volume is just 10.7 million shares--which means that the overwhelming majority of TBT shares are not traded on any given day." That indicates many people are holding them for more than one day. 

For financial advisors especially, this is a major issue. The last thing you want to do is stick a client with this sort of investment for multiple days. And it perhaps would be high maintenance to get your clients out at the end of every trading day. Of course, there are a variety of leveraged ETFs available, some that seek double or triple returns over a day, a month, or lifetime. - Jim