Regulators have issued an investor alert, warning retail investors that leveraged and inverse exchange-traded funds are "highly complex financial products" that "can turn into a minefield for buy-and-hold investors."

The Securities and Exchange Commission and the Financial Industry Regulatory Authority issued the alert, titled "Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors," on Tuesday.

The regulators advise investors to consider leveraged and inverse ETFs only if they're confident the product can help meet their objectives, and if they're knowledgeable about and comfortable with their risks. Investors should consider seeking the advice of an investment professional, said the alert, which was posted to the SEC's Web site.

It follows a June regulatory notice from Finra, which reminded brokers and securities firms of their sales-practice obligations related to these complex financial products.

"We wanted to alert investors to some of our concerns about leveraged and inverse ETFs, because I think investors may be confused about how to best use these products appropriately in their investment portfolios," said John Gannon, Finra's senior vice president for investor education. "Over time, leveraged and inverse ETFs can deviate substantially from the performance of the underlying benchmark, particularly in volatile periods."

The alert is meant to make sure that both investment professionals and investors are appropriately using leveraged and inverse ETFs as part of an investment program, Gannon said.

Some brokers stopped selling the products or changed their sales practices in the wake of Finra's June notice.

ProShare Advisors LLC, which sells leveraged and inverse ETFs, said, "We are very pleased that the SEC and Finra confirmed that the funds can be suitable to hold for periods longer than one day for a variety of strategies."

The regulators' alert says, "While there may be trading and hedging strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio."

New York-based law firm Labaton Sucharow LLP filed a lawsuit in the U.S. District Court for the Southern District of New York earlier this month, which alleges that ProShare and other parties violated a securities act by failing to disclose risks inherent in its ProShares UltraShort Real Estate fund (SRS), an inverse leveraged ETF, including the risk of a "spectacular trading error."

ETFs trade daily on exchanges like stocks. Leveraged ETFs, sometimes labeled "ultra" or "2X," use futures or derivatives to multiply the daily returns of an index, sometimes striving to double or triple the return. Inverse ETFs seek to return the opposite of the index, or double or triple the opposite of the return of the index.

The alert notes that most leveraged and inverse ETFs reset daily, meaning they're designed to achieve their objectives on a daily basis. Their performance over longer periods can differ significantly from the performance of their benchmark and this effect can be magnified in volatile markets, it says.

"I think it's very counterintuitive to most people that these investment products reset every day and therefore they don't necessarily track the underlying index over an extended period of time - they have a lot of tracking error over time," said Gannon. "That's unusual for an ETF. Most ETFs track their underlying index very closely over an extended period."

Scott Burns, director of ETF analysis at investment-research firm Morningstar Inc., said the alert may portend regulatory action.

"This looks like it's definitely on their radar, and they're getting serious about advising people about the risks of these products for buy-and hold investors," said Burns. "That's something we've always said. These are trading vehicles, and they do have amplified risks. At least if you're trading them, you won't be subject to some of the vagaries of the mathematics, the compounding and the volatility drag. Every day you hold one of these longer than a day, the probability that it will deviate from its benchmark goes up."

Ken Leon, an equity analyst with Standard & Poor's, said, "I think it adds gravity to the importance of the views of regulators having both the SEC staff and Finra come out with very direct explanations of ETFs and the potential risks of leveraged and inverse ETFs when they're used for investment purposes more than on a daily basis. This was a concerted effort by two regulatory bodies to make sure that the market and, particularly, investment advisers provide all the caveats to their clients about investing or trading in inverse or leveraged ETFs."

It remains to be seen whether providers of these ETFs will terminate the products or "just continue based on the interest the market has," Leon said.

-By Daisy Maxey, Dow Jones Newswires; 212 416 2237; daisy.maxey@dowjones.com