January 30, 2020
Dear Sirs or Madams,
Please reconsider implementing rule #S7-24-15. I have used leveraged ETFs to enhance my returns in my portfolio for 7 years now. I use a rebalancing approach to maintain 3-5% exposure in TQQQ and SPXL and this has been a very effective way to improve my overall performance. My brokerage firm Charles Schwab and every resource available provides ample warning about the unique risks associated with these instruments. Further, in terms of risks, it is true that they do have 3x beta and can drop significantly during an adverse market movement -- but individual stock securities can be just as bad -- if not worse. Indeed, stocks can go to $0 (Lehman Brothers, Enron) and lose a significant amount of money over a short period (General Electric). Leveraged ETFS are based on indexes and though they can move significantly they will recover as the underlying indexes recover. That has been my rational for using them. The question isn't "are they volatile?" My question is "where will the Nasdaq 100 or SP 500 be in 3-5 years?" If a company goes out of business the stock cannot recover. As proof, examine the performance of TQQQ from December 2018 - December 2019. December 2018 saw a significant downturn in the markets, TQQQ fell significantly -- I re-balanced and "bought low", TQQQ recovered with the Nasdaq 100 and my portfolio outperformed the market significantly. I rebalanced again and sold high. For an investor to lose all their money in one of these investments the underlying index would have to drop an unprecedented 33.3% in one day. This has never happened and though it cannot be ruled out as impossible I would like to restress that individual securities can and do go to $0 regularly and this worst case scenario will only result in the loss of the money invested -- no more. This is in contrast to futures and options where an investor can lose significantly MORE than they invested. Further, a study of significant market movements will reveal the very large drops are frequently followed by very large increases as investors buy the dip.
Without these instruments, It would not be possible for me to duplicate this in my portfolio safely. I would have to use my margin account and use borrowed money to buy individual securities -- and I cannot buy enough of the securities to duplicate the Nasdaq 100 so I would have the added risk of not being diversified. Only the large hedge funds and professional institutions would have this capability.
In conclusion, I hope I have made a case as to how useful these instruments are to us more basic investors -- I do not have the resources of a large hedge fund, I do not have the capital or skill to invest in futures. I can, however, use leveraged instruments as part of my diverse portfolio to enhance my performance over the long-term. There are safeguards in place in that there are ample warnings as to their unique risks, investors cannot lose more than they've invested, and these instruments are more or less no more risky than individual stocks -- and may be less risky as stocks can go to $0 and never recover.
Implementing this rule will eliminate a very useful tool that allows a small investor like me to enhance my returns over the long-term, without undue risks when implemented as part of a diversified portfolio.