Big swings in leveraged funds make them a poor choice for many investors

With leveraged exchange-traded investments back in the headlines, many observers are muttering, There ought to be a law. A law that keeps such products out of the hands of small investors. Regulators ought to be listening.

The most recent brouhaha involves the VelocityShares 2x Long VIX Short-Term exchange-traded note, issued by Credit Suisse Group AG. In late March, the ETN—widely known by its ticker symbol TVIX—fell 60% in just a few days. That was after it attracted $584 million of new investor money during January and February, according to Morningstar Inc.

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TVIX is designed to provide holders twice the daily return of the Chicago Board Options Exchange Volatility Index, or VIX, which measures the expected volatility of the Standard & Poor’s 500-stock index.

The VIX on its own is prone to wild swings. TVIX, thanks to its leverage, takes a risky investment and makes it downright treacherous. (This, even before considering the complex structure of exchange-traded notes.)

VelocityShares LLC and Credit Suisse load up the ETN’s prospectus and marketing literature with warnings, such as you may lose all or a significant part of your investment, and the ETNs should be purchased only by knowledgeable investors.

Yet, it appears plenty of individual investors have bought TVIX, as they have other leveraged exchange-traded products. In a report published in March, Shan Lan, head of ETF research at Deutsche Bank, reckoned that 88% of the $10.2 billion in leveraged exchange-traded products, or ETPs, he examined are owned by retail. Those statistics likely overstate the case. But even if the real ownership by individuals is half or one-third of Deutsche’s count, that’s a lot of individual-investor money at risk.

The starting point for regulators is to consider whether individuals should be able to buy a leveraged ETP with just a click of a mouse without at least affirming that they understand it is an especially complicated and risky investment.

After all, when investors use another form of leverage—margin accounts—brokerage firms are mandated to provide upfront disclosure about the risks involved. Margin accounts also have mandated limits designed to protect investors.

Perhaps a better question for regulators is why leveraged ETPs should even be accessible to small investors. Might regulators take a page from hedge-fund rules and limit leveraged ETPs to accredited investors with a net worth of $1 million? Or to professional investors and traders?

The fund companies that offer leveraged ETPs claim their products are marketed to sophisticated investors and that their warnings about the risks are clear. If that’s the case, they should have no problem agreeing with those who argue there oughta be a law.

Send questions and comments to Mr. Lauricella at tom.lauricella@wsj.com .