Treat leveraged and reverse ETF sales with care, according to IIROC
In its memo, IIROC observed that reverse ETFs – some of which are also leveraged – are often marketed as a way for investors to capitalize or hedge against downward movements in the market. But because most leveraged and inverted ETFs “reset” on a daily basis, their performance over longer periods of time may differ significantly from their stated goals due to composition effects.
The guidelines reminded member dealers that part of their product suitability analysis requires an understanding of those products. “When it comes to leveraged or inverted ETFs, this means that a company needs to understand the terms and characteristics of funds, including how they are designed to operate, how they achieve that goal and the impact. that market volatility, the ETF’s use of leverage and the client’s expected holding period will affect its performance, ”said IIROC.
The broker must also determine the suitability of a product for specific clients taking into account current information on the client’s financial situation, his investment knowledge, his objectives and his risk tolerance; the composition of the client’s account investment portfolio and the level of risk; and any other matter relevant to the customer’s product or account.
“Although client-specific suitability analysis will depend on the particular investor’s situation, leveraged and inverted ETFs are generally not suitable for retail investors who plan to hold them for more than one trading session. trading, especially in volatile markets, ”said IIROC.
Sales documents and oral presentations, the self-regulator said, must also present a fair and balanced picture of the benefits and risks of leveraged ETFs and reverse ETFs, without omitting any important facts or qualifications. He also reminded Dealer Members that the inclusion of risk information in a prospectus or product description does not compensate for information gaps in sales materials, even if the prospectus or product description product immediately accompanies or precedes the sales documents.