With ETFs, Innovation Breeds More Risk

If you are truly convinced that the price of crude oil will rise today and U.S. stocks will fall, FactorShares 2X: Oil Bull/S&P500 Bear is for you. The exchange-traded fund uses futures to deliver double the daily change in the difference between the price of oil and stocks. “That product represents the result of a lot of feedback from institutional investors, including hedge fund managers, about how an ETF could assist them in implementing their investment strategies,” says Stuart Rosenthal, chief executive officer of New York-based Factor Advisors, which offers the fund.

Exchange-traded funds have grown increasingly obscure and resistant to explanation as they cater to the needs of hedge funds and other sophisticated investors. Because access to those ETFs isn’t restricted to professionals, they are also available to individual investors who may misunderstand and misuse them with devastating consequences. “If you make it available to the masses, watch out, because the masses might buy them,” says Paul Justice, an analyst with fund researcher Morningstar.