May 4, 2020
Dear Sir/Madam,
I would like to ask that these products which I have been using for years will remain available for me and my fellow investors (the general public).
Thank you for your consideration. Please see the points below.
Ran Shallom
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1. Ive been using these products for 9 years now.
2. Risk of forcing investors to Realize a loss on these products: I am writing this letter on March 20th 2020. The SP has just plunged 35% from the peak due to the Coronavirus in a month.
I, and many investors like me, hold a significant number of holdings in leveraged products. I, along with many investors like me, (despite current significant losses on paper) have no intention of selling our holdings as we believe that the market over time will recover to higher highs and the investment will pay off.
Change in regulation could result in forcing investors such as myself to realize losses. When buying these products there was no indication that these products will cease to exist.
Investments should be honored and the implications should be considered.
In addition, I believe that leveraged products are actually a great addition to the tools of investors. Below I list the reasoning for these leveraged products and the risks of making regulatory changes:
3. Service to the investor community: If you are the type of investor who likes to invest in high-quality companies, these products allow you to be connected to the performance of those companies, but have leverage on their performance. Not having this option would push more investors to either look and invest in small unpredictable companies or jump to options and futures. All 3 cases are much more dangerous for the average investor. This is why I would strongly recommend to keep these products available to everyone. They absolutely provide a service. Having people pushed to the 3 options mentioned will most definitely result in higher losses.
4. Complimentary service: As stated in the last point, I believe that these products provide a good middle point between safer equities and options/futures, without having to go to much more unpredictable equities.
5. Short term protection: Allow for short term protection of ones portfolio without the use of options which have time limit element as well.
6. Ease of use: These products are easy to use. Pushing people to use options or futures will result in losses for the ordinary person due to the complexity of those products.
7. Inherent diversification: The leveraged ETFs are mostly based on indices. Not having this option would push investors to look at much more risky investments only to get the return. Not only that this poses a much higher risk due to the characteristics of those securities, it is also time-consuming to create a well-diversified portfolio. Due to this complication, I assume that many people will opt to a small number of securities, which, in turn produce higher risk than they have today with the current products.
8. Risk disclosures: I invest through Fidelity. Before adding such a product to ones portfolio, Fidelity requires the investor to sign that he/she understand the risks involved in using such a product in every account (similar to options and futures). In addition, for every trade, the investor gets a note at the top of the ticket reminding the investor if the potential risk of using the product. These messages are very clear and I would like to state again that I believe that investing in small unreliable companies presents a larger risk to the average investor.
9. Unnecessary to restrict: These tools have other characteristics, risks, and benefits. I have been using these tools for 9 years and have not seen a problem with them. As a service, I dont see why these instruments should be treated differently.
10. Huge disservice to the investment community: These funds serve as important and useful tools. Taking them out of the market will create a great disservice to the investment community and especially to the ones that are using them such as myself.
11. Disruption to service: If there was a restriction on brokers to offer these products, they may choose to stop offering the products. This will create disruptions to people who use the products.
12. Risk of change: Any restriction will potentially affect those products (how they are being traded, offered, liquidity) and can produce losses to people that hold them and use them. Also, if restrictions would be implemented, brokers may try to force people to sell their holdings. That, again, may not be in the investors best interest. Forcing people to sell out of positions does not sound right. Restrictions may push for such outcomes.
13 Unjustified Increased expenses: Currently I buy leveraged ETFs for $0 commission. Moving to options and futures will force me to pay for market data, high commissions, administration, need to roll options, different management protocols. This will increase both the time spent and the cost. This is unjustified.
14. Legislator: I am convinced that the intent of the legislator is to warn investors of riskier investment. It does not seem to be in line with the spirit of the legislator to replace current products with products that are more complex, more expensive, reduce competition, and that can cause losses to current investors.
To summarize, I dont think that there should be any change to these products or the way that investors are authorized to use them. These products provide a very welcome (and in my opinion needed) service. The risks are very well communicated as it is. Any change will be a disservice to the investors community and will produce unnecessary pain.