Investors Wiped Out on Double, Triple Leveraged ETF Misuse

Investors Wiped Out on Double, Triple Leveraged ETF Misuse

RIAs may want to reconsider suggesting such funds to retail customers.

Reviewed by: Lisa Barr
Edited by: Ron Day

There is a new twist to the tragic tale of investors being wiped out. It involves financial advisors pairing their risk-averse clients with double- and triple-leveraged ETFs.  

In a case that unfolded between 2020 and 2022, 11 investors using the services of one RIA lost some $2 million when the firm put their funds into “geared ETPs.” The claimants’ investment firm invested the funds in double- and triple-leveraged exchange-traded funds, which are high-risk vehicles for investors.   

Seven of the 11 lost their life savings. The investors are from Florida, North Carolina and Pennsylvania, and range in age from 41 to 77. The 77-year-old is a widow who forfeited 97% of her funds. There’s also a 64-year-old man, who has been diagnosed with cancer, who lost a large amount. 

“Leveraged ETFs can be extraordinarily risky, and therefore advisors need to use extreme caution when recommending them,” the claimants’ attorney, Chase Carlson, said in an email. “There are very few instances, if any, where leveraged ETFs are suitable for a retail customer.” Carlson practices investment fraud law in Miami Beach, Florida. 

Leveraged ETFs 

Among those products used in the case mentioned above were the Direxion Daily S&P 500 Bear 3X Shares (SPXS) and the Direxion Daily S&P 500 Bull 3X Shares (SPXL).  

“The products, the ETFs, do what they are designed to do. The products performed as advertised,” said Carlson. “It’s just that they are being recommended to people they should never be recommended to.” 

The fatal flaw in Carlson’s case rests with the firm matching up the volatile investment vehicles with investors who counted on the funds to grow and who use them to live on during retirement, he said, adding that the investors in such situations are less likely to realize restitution, because many firms don’t have the money to pay them back. 

Carlson noted this situation is not an isolated case, and that regulatory agencies need to do more to stem the tide of this type of negligence that leaves investors stripped of their investments. He added that such a situation does not represent fraud in the legal sense but constitutes bad action on the part of the financial advisors and RIAs involved. 

The alleged negligent action on the part of the RIA in question speaks to the need to employ FINRA’s two-step suitability rule.  

First, the financial advisor or firm must determine whether the product is suitable for most investors. It must then decide whether the product is right for a particular investor. The financial advisor can do this by studying the investor’s financial and tax status, investment objectives and other information deemed reasonable to determine value to that client. 

The second failing of the RIA, Carlson said, is that it held the leveraged ETFs past the fixed amount of time that was allowed. If the financial professional holds funds longer than the prescribed time, it can lead to a deterioration of the value. That time could be for one day, from the close of trading on day 1 to the close of trading on day 2, or longer. The key is for the financial professional to mind the parameters.  

New SEC Guidance for Leveraged ETFs 

In February, the SEC issued new guidance on leveraged ETFs. It said that most leveraged and inverse ETFs should “reset” daily, “meaning they are designed to achieve their stated objectives on a daily basis. The performance of those can vary quite a bit because of the “stated multiple of their performance.”  

Financial advisors who commented on this case to were flummoxed and offered cautionary tales. 

“I wonder if it was negligence that led to a misunderstanding of what they were purchasing, a mistake or pressure to improve performance,” said Robin Giles, CFP, and founder of Apex Wealth Management in Katy, Texas. “No matter what it was, it was a bad decision that was badly executed.” 

Joey Loss, CFP, and founder of Flow Financial in Jacksonville, Florida, said that the RIA firm involved represents the “worst” in the industry: “This is reckless negligence. If a financial advisor's or RIA’s guidance for a client involves a short-term bet of material client life savings on double- and triple-leveraged ETFs, it’s a gamble of someone else’s money, not a founded strategy.” 


Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, and