SEC`s joint investor alert says leveraged ETFs can lead to big losses

The U.S. Securities and Exchange Commission warned investors for the first time Tuesday that leveraged exchange-traded funds could lead to big losses. The warning follows similar statements from the financial industry and the secretary of state in Massachusetts, who is known as outspoken on securities issues.

The funds have drawn scrutiny because they can yield big losses for investors over time in volatile markets. In an alert to investors issued jointly with the industry`s self-regulating body, the Financial Industry Regulatory Authority, the SEC urged investors to carefully consider the details of these funds. "It is possible you could suffer significant losses even if the long-term performance of the index showed a gain," the SEC said.

The leveraged funds use exotic techniques such as swaps or options aiming to amplify the one-day returns of their target index. Some "inverse" or short leveraged ETFs bet on declines in their underlying index. But in choppy markets such as those of recent months these features can quickly compound losses.

Besides, the agency warned brokers in July that they should closely supervise clients' use of the instruments. Massachusetts Secretary of State William F. Galvin has subpoenaed information from brokerage firms selling the funds. An SEC spokesman said the agency would not discuss if it is also investigating the area. Several major brokerage houses have already suspended their sales of the instruments.