Leveraged and Inverse ETFs (collectively “Non-Traditional ETFs”) are designed to deliver multiples and/or the inverse of the index or benchmark they track over a single trading day. These ETFs have unique risks if held for more than a single trading day, as their performance over time can vary greatly from the stated index they seek to track. This can be further compounded during periods of higher volatility. Advisors must understand the nature and unique risks of these products before recommending them to clients. Non-traditional ETFs should be part of a defined asset allocation strategy which accounts for a client’s specific risk tolerance and investment objectives. They are not typically appropriate for buy-and-hold strategies and/or long-term investments. Therefore, even in discretionary investment accounts, it is important that investors understand the risks associated with these non-traditional investments. The SEC has an investor bulletin that outlines the risks associated with these investments as buy-and-hold strategies.
Mutual will monitor any non-traditional ETFs that are held in client accounts longer-term. There will be an initial request for information for any non-traditional ETF holdings that are held for greater than 14 days. An additional request for information will be made for any non-traditional ETF holdings that are held for greater than 6 months. Additional information will also be required to be provided for any clients that have more than 10% in any specific non-traditional ETF holding. Below are the questions each advisor will have to answer for the three scenarios listed above.
Non-Traditional ETF Held More Than 14 Days (Per Non-Traditional ETF)
1. What is the investment strategy/reason for investing in this asset for longer than 1 trading day?
2. How long do you expect to be invested in this asset?
3. Will you be monitoring the account daily?
4. What factors will be taken into account to determine when to exit the position (such as price, specific market indicators, loss percentages, etc.)?
5. Have you disclosed all risks associated with this type of investment to each investor, including the risk of compounding performance variance? (See Investor Bulletin: Leveraged and Inverse ETFs)
Non-Traditional ETF Held More than 6 Months (Per Non-Traditional ETFs)
1. What is the ongoing investment strategy for this position?
2. Have you been monitoring these accounts on a daily basis? If not, how frequently have you been monitoring these accounts, and why not daily?
3. What will cause you to exit this position in investor accounts?
4. When is the last time you discussed the investment strategy for this position with the investors?
5. Have you provided these investors a copy of the Investor Bulletin: Leveraged and Inverse ETFs? [This is required to be provided to any investors holding a non-traditional ETF more than 6 months.]
Non-Traditional ETF Concentrated Position (More than 10% of Portfolio; Per Client and Holding)
1. What is the ongoing investment strategy for this position?
2. Have you been monitoring these accounts on a daily basis? If not, how frequently have you been monitoring the accounts, and why not daily?
3. Why is the concentration in this position above 10%? Is it still appropriate for these investors at this concentration? If so, please provide a detailed explanation per investor as to why holding more than 10% of their household value is appropriate.
4. What will cause you to exit this position in these accounts?
5. When is the last time you discussed the investment strategy for this position with the investors?
6. Have you provided these investors a copy of the Investor Bulletin: Leveraged and Inverse ETFs? [This is required to be provided to any investors holding a non-traditional ETF more than 6 months.]