October 14, 2020
I am commenting on the proposed SEC Rule on leveraged and inverse ETFs as a retail investor who uses these products for enhanced returns and risk management. I think the proposed diligence required by the broker is unnecessarily burdensome and that the investor alone is responsible for their own due diligence.
Before investing in these products, I researched them thoroughly: I read prospectuses, I backtested with the ETFs, and I computed estimated returns on data that predates the existence of these ETFs. I am fully aware of the phenomenon of volatility decay and that in a stochastic environment the mode leveraged fund will trend towards zero. I am also aware of the management problems of some of these ETFs that cause them to deviate from the expected multiple of the underlying. Nonetheless, I find their inclusion in my portfolio useful.
I primarily use these products to enhance the returns of my portfolio. My back-testing work has shown that a daily multiple of 2x leads to enhanced returns across most indices in my sample compared to their underlying index (Nikkei being a significant exception). Volatility decay and increased compound returns are two sides of the same coin, that need to be managed with these products. I balance the risk of these products with assets that have lower volatility and beta. I also understand the market environments such as high volatility that would lead to these assets under-performing.
I have spent a significant amount of time developing a successful strategy that uses these products. It would be unfortunate to me if my broker stopped offering these products due to the high diligence requirement proposed.