Leveraged ETF's May Not Be Suitable For All Investors

ProFunds Group is warning investors that some of its inverse and leveraged mutual funds mightn't be suitable for all investors and should be used only by knowledgeable investors.

The Bethesda, Md., asset manager added the strong language in a key descriptive filing it made with the Securities and Exchange Commission in the past week.

Michael Sapir, chief executive of ProFund Advisors, said, "We have always placed a high value on educating investors and providing full and complete disclosure, as we have in adapting our disclosure to the new summary prospectus format." Mutual-fund companies are beginning to adopt new rules authorizing summary prospectuses, which seek to simplify key investment information.

Earlier this year, ProFunds, the largest provider of leveraged exchange-traded funds, revised risk descriptions in prospectuses for its ProShares ETFs, adding additional details on returns to help show the effects of compounding.

Suitability Issue

That move came as regulatory concerns were raised about the suitability of inverse and leveraged exchange-traded funds, or ETFs. Leveraged ETFs use futures or derivatives to multiply the daily return of an index, sometimes striving to double or triple the return. Because they reset each day, their results over longer terms can diverge widely from the index. Inverse ETFs seek to return the opposite of the index.

Added Warnings

In the latest filing, ProFunds added warnings on its Ultra ProFunds, which provide leveraged exposure to indexes, and on its Inverse ProFunds, which seek daily investment results that either match or double the opposite of the daily performance of their benchmark indexes.

"The Fund is different from most funds in that it seeks leveraged returns and only on a daily basis. The Fund also is riskier than similarly benchmarked funds that do not use leverage," the document warns for UltraBull ProFund, for example. "Accordingly, the Fund may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results."