Vanguard Won’t Let Investors Trade These Popular—but Controversial—Products

Vanguard Won’t Let Investors Trade These Popular—but Controversial—Products


Vanguard Group will no longer allow individual investors to make new trades on certain investments that seek to magnify bets, pouring cold water on strategies that became popular after the last financial crisis.

Starting January 22, customers won’t be able to purchase so-called leveraged or inverse products via Vanguard’s brokerage platform, the firm said in a release this past week. That cuts out roughly 400 such securities and funds currently offered on that platform.

The move by the world’s second-largest money manager by assets comes as these complex products gain traction among investors and increased scrutiny from regulators because of the risks involved. Leveraged funds magnify gains–or losses–of an index while inverse products seek to produce the opposite performance of an index.

Annual volumes for one popular product, ProShares Ultra VIX Short-Term Futures Exchange-Traded Fund, have soared nearly 40-fold to about two billion shares traded in 2018 from roughly 50 million in 2016, FactSet data show.

Vanguard said in its release that it is taking action because the products are “generally incompatible with a buy-and-hold strategy.” The firm hasn’t offered leveraged or inverse products of its own. Brokerage customers who bought such financial instruments before the deadline can continue to own them, sell the products or transfer them to a different institution.

A spokesman for ProShares said “for over 25 years, these funds have helped investors manage risk and enhance returns, including by hedging their portfolios during market downturns.”

Regulators have raised questions about these types of products. Last year Securities and Exchange Commissioner Kara Stein warned in a speech about the rise in leveraged strategies, questioning whether certain “complex and esoteric” products should target individual investors.

In a 2017 agreement with the Financial Industry Regulatory Authority,

Wells Fargo

& Co. compensated customers after recommending exchange-traded products linked to stock-market volatility without fully understanding the risks. That followed a $2 million fine for Wells Fargo in 2012 for violations related to leveraged, inverse and inverse leveraged products. At the time of the second penalty, a Wells Fargo spokeswoman said the firm was committed to helping its clients achieve their investment goals.

Leveraged and inverse funds that wager on volatility gained prominence after the last financial crisis as a way to bet on the size and severity of stock-market moves.

Some, like the ProShares Short VIX Short-Term Futures ETF, were used to execute the so-called short-volatility trade that markets would stay calm.

When markets turned volatile last February, some funds that bet against volatility suffered losses, prompting the closure of an inverse exchange traded note. Some investors have sought to recoup losses by suing

Credit Suisse Group
AG

, which managed the note that closed.

Credit Suisse, which declined to comment, has said in a court filing that investors were warned that holding the exchange-traded product as a long-term investment could cause losses.

Other retail brokerages like

Charles Schwab
Corp.

,

TD Ameritrade Holding
Corp.

and Fidelity Investments still offer the products, though investors opting to buy them receive additional prompts to make them aware of risks.

A Vanguard spokeswoman, Emily Farrell, said the decision to ban the products from the company’s brokerage platform wasn’t connected to any recent market volatility. Last summer Vanguard decided to make online trading of all exchange-traded funds available on its brokerage platform commission free – with the exception of leveraged and inverse products.

Ms. Farrell added that these products represent a small segment of hundreds of thousands of securities that Vanguard’s customers can buy and sell. “A very small proportion of our client base utilizes these types of investments,” she said.

The funds that can no longer be traded include volatility product ProShares Ultra VIX Short-Term Futures ETF, known by its stock symbol UVXY, and the ProShares UltraPro QQQ, or TQQQ, which had about $3.5 billion in assets as of Friday, FactSet data show.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Dawn Lim at dawn.lim@wsj.com



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