Buyer beware? Increasingly complex ETFs may burn investors due to market backdrop

From single-stock to inverse exchange-traded funds, firms person been selling much analyzable strategies offering perchance monster gains to idiosyncratic investors.

However, the caller marketplace volatility whitethorn beryllium intensifying the hazard of losses.

Openinterest.Pro co-founder and main strategist Mike Khouw warns erstwhile markets crook little oregon plaything sharply, these leveraged products tin underperform the assets they way and struggle.

"Leverage is simply a precise appealing happening erstwhile the lone things you've noticed implicit the people of the past mates of years is that prices are rising," the CNBC contributor told "ETF Edge" this week. "But having leverage is simply a double-edged sword."

The reason: leverage often adds different furniture of risk. Khouw notes galore lightly leverged ETFs usage tools specified arsenic full instrumentality swaps oregon options to present the other vulnerability they advertise. To support that leverage, portfolio managers indispensable regularly set their positions, and it get tricky successful a choppy market.

Khouw, whose steadfast focuses on options-focused probe and analytics, said the detonation of play and adjacent regular options has made the marketplace truthful time-sensitive and analyzable that astir retail investors can't realistically negociate these trades connected their own. 

"Finding a merchandise wherever fundamentally idiosyncratic other tin grip immoderate of that for you ... democratizes those products. That's the bully news," Khouw said. "The atrocious quality is that sometimes the investors' acquisition oregon knowing of some options and immoderate of these products isn't keeping gait with their accelerated improvement and issuance."

Nate Geraci, president of NovaDius Wealth Management, sees 2 main trends down the maturation of inverse and leveraged products successful the analyzable ETF space.

First, helium sees a alteration successful retail capitalist mindset. They are chasing products that advertise overmuch bigger, "astronomical" returns — adjacent if they bash not afloat grasp the risks.

The 2nd inclination is accrued contention successful the ETF market, according to Geraci, whose steadfast rebranded to NovaDius Wealth Management from The ETF Store earlier this year.

"There's fundamentally an arms contention among ETF issuers," said Geraci, who added it besides opens up the anticipation for "significant losses."