March 12, 2020
I am writing the SEC to encourage you to reconsider moving forward with legislation that would make it more burdensome, and likely prohibit most investors from participating in the leveraged ETF market. My reasoning is below, I hope you thoughtfully consider how this will affect many small retail investors like myself, who have studied these leveraged products thoroughly, as one should before investing in them, and came to the conclusion that they can enhance my returns as I work toward, hopefully, one day retiring.
1. The SEC should encourage individuals to inform themselves, which will make them better investors...not outright prohibit products:
Understanding and informing ourselves is the responsibility all individuals bear and understand as citizens of this country. The SEC can aid in this by promoting brokerage firms to provide more information on investment products. But don't make the burden so substantial that brokerage firms will find it too costly to continue allowing their customers to buy into leveraged products. That benefits no one, and ultimately, it's small retail investors that will lose out. If brokerage firms are forced into costly background checks to confirm that an investor has the acumen to buy said products, they'll just discontinue selling them. That's not what the end game should be.
2. The SEC should encourage small retail investors to be able to beat large funds and allow for investors to be able to beat the market:
Leveraged ETF's give small investors a way to beat the market. They are a GREAT tool for this. Studies have shown that only 1 out of 5 fund managers can beat the market. That's how difficult it is. The best market participants can only beat the SPY 1 out of 5 times. And yet, small investors have the ability to because they can enhance their portfolio returns using leveraged products. It gives the little guy a fighting chance and a distinct advantage over these huge fund managers. The SEC should encourage this.
3. My brokerage firm, Schwab, already makes me sign a waiver yearly that states the risks of buying leveraged products:
Schwab is a great brokerage and has been out in front on this. I respect them for making their customers research these products and signing off that they have read up and have an understanding of what leverage before being allowed to purchase these products. This is the way to go in my opinion. Push brokerages to have their customers sign a yearly waiver that states the risks of these products. The onus is on the individual to stay informed. That's a core tenet of our country. The brokerage houses can continue to provide information on these leveraged products, as Schwab does, and then the individual can decide for themselves if it's too risky, which many will. That is how this should be handled. Encourage information transfer rather than making it more difficult for small investors to buy into products that they, themselves, have decided are appropriate and understand the risks associated.
4. The SEC will inadvertently push many small investors into the options market:
The law of unintended consequences will be at work here. If leveraged products are no longer available due to brokerages finding the approval process to be too burdensome, small investors will reach for their returns in the options market, which is a far riskier derivatives market than leveraged ETF's are. The return for most options, as you know is $0. Most investors can't wrap their heads around the math of options, and will ultimately lose money...and likely a lot of money. But the SEC will be encouraging further risk-seeking if leveraged ETF's are no longer provided by brokerage firms.
5. Lastly, if you're looking to enhance regulation in this sector, it should be geared toward leverage ETN's, which are different than leveraged ETF's. ETN's move toward $0 over time because as Exchange Traded Notes, they move as the futures contracts move, which is down over time because each quarter, the old futures contract gets rolled into a new futures contract, and as you know, there is time decay associated with this. These products deserve much more scrutiny than leveraged ETF's, which simply enhance a stock market's returns by either 2x or 3x depending to the product, and don't deal with the time decay the ETN's do. I think the SEC should differentiate between the two when targeting enhanced regulations for these products.
I appreciate you taking the the to read through my rationale on why investors should be allowed to continue to invest in leveraged ETF's. I hope you decide to encourage investors to be better informed on these products rather than make it too burdensome for brokerages to sell them any longer.