After issuing an overly broad regulatory statement on the suitability of inverse and leveraged ETFs, theFinancial Industry Regulatory Authority (FINRA) has clarified its position.

In June, FINRA issued a notice that said “…inverse and leveraged ETFs are typically not suitable for retail investors who plan to hold them for more than one trading session…”

After industry push back on the sweeping nature of the statement, FINRA posted a podcast on July 13 in which it confirmed that FINRA member firms could reasonably recommend that a retail investor hold these ETFs for longer than one day, provided a suitability assessment is conducted with respect to such an investor and the ETF.

The podcast specifically addresses the use of inverse and leveraged ETFs as part of sophisticated trading strategy:

“Leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional. At times, this trading strategy might require a leveraged or inverse ETF to be held longer than one day.”

ETF managers are taking steps to better inform investors and advisors on the design and performance characteristics of leveraged and inverse ETFs.  For example, ProFunds Group has added an “Open Letter” to the company’s website that says:

“Because of the daily objective of leveraged and inverse funds, investors should monitor their performance, as frequently as daily. By doing so, investors can see if their leveraged or inverse funds are achieving the daily target multiple over periods greater than one day, and, if necessary, rebalance fund positions to maintain the targeted exposure.”