February 3, 2020
In considering this rule change, I urge the SEC to avoid created barriers to trading in leveraged funds for the average individual investor.
Ample warnings to the risks of holding leveraged ETFs long-term are available in their investment prospectuses: from the prospectus for ProShares Ultra SP500 these include volatility drag, tracking errors, and the potential to lose the entirety of principle in a single day.
Ample warnings to the risks of holding leveraged ETFs long-term are available from third-party websites that everyday investors use to educate themselves: mere minutes on a search engine will provide results from Investopedia, The Balance, SeekingAlpha, and others.
Ample warnings to the risks of holding leveraged ETFs long-term are even shown by brokerages to their customers when attempting to purchase a position in a leveraged fund. See the following example from Charles Schwab Co: For most of these products, the amount of leveraged or inverse exposure resets each day. The daily resetting has a compounding effect that can cause these securities to perform worse than their multiple would suggest over any period longer than one day. It is important to remember that most of these securities are designed for daily use only, and are not intended to be held overnight.
It would seem that an everyday investor would only know of the potential benefits of holding a leveraged ETF long-term if they had the sophistication to figure it out independently. An investor with that basic level of sophistication should also understand that every investment strategy needs a balance of risk and return – and that leveraged funds, as risky as they are, should only make up a small component of a portfolio.
In summary, I agree with my fund manager ProShares that The SEC has not shown there is a problem that needs to be solved with respect to leveraged and inverse funds.
If the SEC is compelled to add oversight to leveraged exchange-traded products, I hope the individual investor is not frozen out, leaving these important tools to only the wealthiest Americans.
William Bedell, Ph.D.