Although Potentially Lucrative, Oil ETFs Carry Extreme Risk
From the Desk of Jim Eccleston at Eccleston Law LLC:
So far this year, leveraged oil funds have been among the top-performing exchange-traded funds (ETFs) of 2019. Some examples of the most lucrative ETFs include the Velocity-Shares 3X Long Crude Oil exchange-traded note, which is up 89% this year and the United States 3X Oil Fund, which is up 88%.
However, investors should be aware that Oil ETFs are volatile because losses are amplified when the market reverses. Furthermore, these funds require the average investor to correctly predict when oil prices will rise. In addition, even when oil prices actually rise, the average investor is required to take into account that he or she must rebalance daily, which could end up eroding any actual return. Notably, last year, while oil prices were down only 7%, triple-leveraged products lost almost 40%.
The risks involved with oil ETFs are why firms like Charles Schwab Corp. and Vanguard Group impose guardrails on investors trying to buy leveraged products. In addition, both FINRA and the SEC have warned brokers that leveraged ETFs are potentially unsuitable and should not be recommended to long-term investors.
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Related Attorneys: James J. Eccleston
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