Monday, June 27, 2011

Iowa Insurance Division

News & Information (For Immediate Release)                                              


Iowa Insurance Division                       Contact: Tom Alger, Communications Director

330 Maple Street                                                   Phone 515.242.5179 Fax 515.281.5309

Des Moines, IA 50319                                      

June 27, 2011                                                        


Iowa Insurance Division Cautions Retail Investors about Exchange-Traded Funds

Certain ETFs May Not be Appropriate for Long-term Investors



DES MOINES, JULY 27, 2011 – Exchange–traded funds (ETFs) have grown increasingly popular with retail investors during the last decade. Securities regulators are concerned that investors may not understand how these complex investment products work or the potential risks they may face.


The Iowa Insurance Division (IID) today cautioned investors to make sure they understand ETFs before they invest and consider whether these investments are right for them. IID’s ETF advisory is available at


 “As with any investment, investors should know what they are investing in. They should understand the risks, costs and tax consequences before investing in ETFs. Check under the hood,” said Securities Bureau Chief Jim Mumford.


Exchange-traded funds are baskets of investments such as stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector.


While ETFs are often compared to mutual funds and marketed to investors seeking safe, stable investments, not all ETFs are the same. IID’s advisory notes that some traditional ETFs may be appropriate for long-term holders, but others, including exotic leveraged and inverse ETFs, may require daily monitoring.


Two years ago, the association of state securities regulators, the North American Securities Administrators Association (NASAA), identified unsuitable ETF sales as a top threat to Main Street investors. “We continue to actively scrutinize a variety of issues related to ETF sales practices, such as point of sale disclosures, and the suitability of these products, particularly inverse and leveraged ETFs for long-term investors,” Mumford said.


The ETF advisory outlines several risks associated with ETFs, including:


  • Liquidation.The number of ETFs that are shut down or liquidated, while previously a rare occurrence, is on the rise, up 500 percent in each of the last three years over 2007 levels (which equates to one ETF each week).
  • Fees.Leveraged and inverse ETFs must be traded all the time, therefore incurring substantial brokerage fees and commissions.
  • Tax Consequences.Leveraged and inverse ETFs may be less tax efficient due to daily resets that can result in significant short-term capital gains that may not be offset by a loss.


“Before you invest, you should contact IID to determine if the ETF and the person recommending the investment are properly registered with Iowa,” Mumford said. Contact IID at 877-955-1212.


About the Iowa Insurance Division

The Iowa Insurance Division (IID) has general control, supervision and direction over all insurance and securities business transacted in the state, and enforces Iowa’s laws and regulations. The IID investigates consumer complaints and prosecutes companies, agents and brokers engaging in unfair trade practices. Consumers with insurance or securities-related questions or complaints may contact the IID toll free at 877-955-1212 or visit the division on the web at