Subject: File No. S7-24-15
From: Michael Iannuccillo
Affiliation: hedge fund / family office fund manager

March 10, 2020

I've been using levered ETF's for as long as they've been available. Losses in any year were minimal because I use stop losses underneath any position, including these. The simplest way for the SEC to fix any problem it sees with these products is to force these ETF providers to include more information on using stop losses under positions so people don't take big losses and force providers to include warnings about overnight losses and what they could be if used improperly in volatile markets. I'm pretty sure any investor that takes a sizeable loss is not going to use these again if that happens or at least properly size a position afterwards.

I have undergraduate degrees in Finance and Economics and an MBA from Harvard Business School. I've been investing since 1988. I have used 2x and 3x ETF's for years in my hedge fund and family office. Somebody with my background should be grandfathered in to any law change. The amount of assets in these funds is minuscule compared to the overall ETF or mutual fund universe. That's because any kind of levered trade is by it's nature riskier than normal. Bit those of us who are experts in the market and use these funds as tools understand their value.

I'm well aware of the risks of using these products, but those risks are mitigated by proper risk management, position sizing and market experience. Why use these at all? Because they provide a rapid way to express a position with far less money at risk than un-levered funds do. Each position can be a lot smaller with a 2x or 3x fund than it would be with a normal position. This provides major benefits to traders because if you use them smartly, you can keep a large portion of your investable funds in cash and trade only a portion of it to get similar returns. As well, the smaller position sizing allows much easier entry and exit and risk protection in the form of stop losses and stop limits.

For market professionals, these are a very, very useful tool, just as option contracts are a tool. A lot of inexperienced investors lose money on options contracts, too, but that doesn't mean they should be banned from professional use. In times of market downturns, using a 2x or 3x short fund to hedge a portfolio if a quick way to buy protection for market participants who are not options experts. To have to re-create these using separate options is a pain in the neck.

Not everybody should be in these products and current warnings and disclosures do highlight the risks adequately. You can never keep inexperienced people from hurting themselves in markets - they will find other ways of doing it if these weren't available. The only difference is position sizing. You have to use smaller positions. And use stop losses and be aware of when to hold positions over night and when not to. Those who make mistakes get the best teacher possible - losses - to make them not do it a second time. I doubt many make repeated mistakes with these products. If somebody holds a 2x or 3x fund position overnight and it goes against them the next morning, it will teach them that they should have had a smaller position size and they won't make that mistake again.

With regard to the decay aspects of these products, it's mimics to a large extent what happens with the underlying options used to create them and the options markets in general. The SEC doesn't ban options trading, it simply requires more lengthy disclosure. The same should be the goal here. If somebody holds a position that is going against them, again any losses will teach them not to do it a second time and to scale back on position size. Mistakes happen faster with these products, but so does the learning.

If I were the SEC, I would simplify the issue this way: require people who trade to have one of the following: (1) an MBA degree or (2) a Finance undergrad degree or a (3) a CFA or (4) proof of 1 years experience using the products.

Anybody with just one of these criteria ought to qualify as an investor who understands the risks. If you force ETF distributors like Fidelity or Schwab to examine trading records or the like it will be a silly burden on those firms. If an investor with these basic qualifications is willing to sign a contract that they assume the losses and understand the risks, that should be adequate.

I'm happy to talk more on the subject if you'd like to contact me using the email provided.


Michael Iannuccillo