Subject: N/A
From: Jon Wolfenbarger

Mar. 18, 2020

Comment on SEC Proposed Rule #S7-24-15: 

I am writing to ask the SEC to please not make it any more difficult — or impossible — for individual investors to protect and grow their financial assets by investing in inverse and/or levered ETFs. 

Inverse and levered ETFs have been one of the most beneficial financial innovations for individual investors since the creation of the ETF itself. 

Why do individual investors want and need to be able to invest in inverse and/or levered ETFs? 

For the same reasons they want and need to be able to invest in any financial asset: to protect and grow their wealth, lower their risks, diversify, etc. 

Individual investors like me want and need inverse and levered ETFs to help protect and grow our financial assets in a very volatile and risky world, often made more volatile and risky by government tax, fiscal, monetary and military policies. 

We do not need the SEC putting yet another governmental roadblock in front of individual investors who are trying to protect and grow their hard-earned wealth over time. 

With countless free (and paid) online resources and SEC-required financial disclosures, prospectuses, etc., investors have a wealth of information to research and learn about inverse and levered ETFs. Individual investors can easily read and understand the holdings, strategies and track records of these ETFs, just as they can with any other stock or ETF. 

Any individual investor smart and sophisticated enough to earn and save money, pay their taxes, open a brokerage account and trade any other stock and ETF (that they know they will make money on when the price rises and lose money on when the price falls) is certainly smart and sophisticated enough to understand that an inverse ETF will fall in price when the underlying asset rises in price (and vice versa) and that a levered ETF will rise or fall by more than the percentage change in the underlying asset’s price. 

That is not complicated to understand. In fact, it is much easier to understand than whether a biotech company’s new drug will be approved by the FDA or if a new microchip will be highly successful or if the Fed’s latest interest rate cuts will prevent a recession (which they did not do in the last two major recessions and bear markets)! 

With investors already investing billions of dollars for many years in inverse and levered ETFs, they clearly see enough value in them to invest their hard earned money in them. The SEC should not presume to be smarter than all these individual investors. 

Please do not make it more difficult or impossible for individual investors to buy something that fits with their personal investment strategies and goals. The SEC should not be determining how much risk (or the direction of that risk) individual investors should take. That should be up to the individual, with guidance from various resources of their choice, including SEC prospectuses, financial advisors, etc. 

What is the SEC’s concern about inverse and levered ETFs? 

The fact that inverse and levered ETFs use derivatives cannot be a real concern, since 
many ETFs that are not inverse or levered ETFs also use derivatives, including many index ETFs and most commodity ETFs/ETNs. 

The fact that inverse ETFs fall in price when the underlying asset (e.g., S&P 500) rises in price also cannot be a real concern, since many individual stocks and ETFs also fall in price when the overall stock market is rising in price (although perhaps not by design!). 

The fact that levered ETFs rise or fall in price more than the underlying asset also cannot be a real concern, since many individual stocks also often rise or fall in price much more than the overall stock market. Some individual stocks have risen or fallen 30, 40%, 50% or more in a single day, which would be virtually unheard of with most inverse and levered ETFs. Should individual investors be prevented from buying all of those “risky and volatile” stocks? Should individual investors not be allowed to buy any stock, ETF or other financial investment that has a negative beta or a beta greater than 1.0? If so, why? 

Why should the SEC be determining the direction and volatility of the financial assets that individuals buy? 

Individual investors are well aware that financial (stock, bond, REIT, commodity, currency, etc.) markets do not only go up. If they did, investing would be very easy! 

It is very challenging for individual investors such as myself to protect and grow our financial assets to provide for our family's long-term well-being in the face of extensive government taxation, as well as inflation and boom and bust business cycles driven by government monetary policy, including the constant manipulation of interest rates and the money supply. 

We do not know if Social Security will be able to provide for our retirement in the future, so we have to be able to invest freely in order to survive (literally survive, being able to afford a roof over our heads and put food on our table!). 

I have an MBA in Finance from Duke University and have earned the CFA designation. I was an equity analyst for over 22 years at Allianz Global Investors, after working for years in investment banking at Merrill Lynch and JP Morgan. I am now retired and trying my best to provide for me and my family with the returns I make on my investments. 

I worked as an analyst during the devastating early 2000s and 2008-2009 bear markets. I know that it took about 25 years for the US stock market to recover back to the 1929 peak. I know that the Japanese stock market is currently nearly 50% lower than it was over 30 years ago! 

John Hussman, Stanford Economics PhD and fund manager, makes an excellent case in this article that the stock market will be lower than it is now in 12 years, likely with a 60%+ bear market in the meantime: 

Individual investors like me cannot afford to lose 50% or more of our money in a stock bear market — and certainly not for decades! 

Since the SEC cannot protect individual investors from all the risks in the world, including devastating bear markets that last for decades, inflation, deflation, boom and bust business cycles, wars, taxes, etc., the SEC should allow individual investors to use their best judgment to invest in the best ways they see fit to try to protect and grow their financial assets in whatever environment they find themselves in. 

Without inverse and levered ETFs, how will individual investors be able to protect and grow their wealth if the stock market falls 50%+ again? How about if it falls 50% for 30 years, as it has in Japan? 

Inverse ETFs provide the easiest and LEAST risky way for individual investors such as myself to survive and potentially prosper during a devastating stock (or bond, REIT, commodity, currency) bear market. Futures and options are much more complicated and risky. And trying to borrow and short traditional ETFs and stocks is also much more difficult, complicated and risky for individual investors than simply buying an ETF that trades like a traditional stock or ETF (but in a different direction). 

Inverse ETFs also provide an easy and intuitive way to investors to hedge long positions in a given asset. Much easier and less risky that futures and options and shorting. 

Futures, options, margin loans, shorting, etc. are ALL generally more complex and risky for individual investors than are inverse and levered ETFs. That is why individual investors have invested billions of dollars in inverse and levered ETFs. 

Just putting money in the bank or a money market fund may not protect or grow an individual’s wealth in the next devastating bear market, with the risk of taxes and inflation and now the possibility of negative interest rates. 

Buying government bonds may also not enable individuals to protect or grow their wealth, given the risk of higher interest rates from inflation and/or government default on their massive funded and unfunded liabilities. 

So how will investors be able to protect and grow their wealth in a devastating stock (or bond or commodity or currency) bear market? How will the SEC help them do that, if they make it more difficult or prevent them from investing in inverse and levered ETFs? 

Why should it be easy for an individual investor to buy a biotech or tech stock with no profits and little revenue that could easily go to $0, and yet not be able to buy an inverse S&P 500 ETF that will likely NEVER go to zero? That does not make any sense. And it does not make life less risky for the individual investor. In fact, it makes life MUCH MORE RISKY. 

Likewise, levered ETFs (whether traditional “long” or inverse “short”) provide tremendous value for investors to not only profit by a greater amount when they invest well, but also by enabling them to diversify their portfolios more easily. A 2x long levered ETF enables an investor to have the same profit and loss potential with half of their capital invested in a given asset, thereby freeing up capital to invest in other assets and diversify more. 

Levered ETFs can also be very useful for hedging and are much easier, more intuitive and less risky than using futures and options. Individual investors are well served by professional SEC-regulated investment firms that know how to use futures, options, swaps and other derivatives to create ETFs that are much easier, more intuitive and less risky for the individual investor than futures, options, margin loans, borrowing and selling short, etc. 

Finally, in addition to the very important utilitarian benefits to investors that inverse and levered ETFs provide — by making it possible for investors to survive and potentially profit in otherwise devastating bear markets and diversity and hedge their assets more easily — there is also a major ethical and legal issue at stake. 

That ethical and legal issue is the freedom of individuals to be able to trade freely and voluntarily in the financial markets with their hard earned money however they see fit, as long as it is ethical and they are not harming others. If the SEC makes it more difficult or impossible for individual investors to buy inverse and levered ETFs, what is next? Banning any investment that is more volatile than the S&P 500 or could fall in price if the S&P rises in price? If so, then virtually all investments would be banned and we can shut down the financial markets! 

Individual investors such as myself are not stupid. We know how devastating bear markets can be. We know the risk of wars, inflation, taxes, pandemics, manias, etc. The SEC cannot protect us from those risks. 

By making it more difficult or impossible for individual investors to buy inverse and levered ETFs, the SEC would make it MUCH more difficult for individual investors to try to protect and grow our financial assets in the face of those risks. 

Why should only the very wealthy be able to protect themselves and try to profit from those risks with hedge funds, futures, options, swaps, margin accounts, etc.? Why not CONTINUE to allow smaller individual investors to also do that by ALLOWING them to invest their hard-earned money in well-managed, highly SEC regulated, easy and intuitive inverse and levered ETFs? 

Jon Wolfenbarger