March 28, 2016
I am writing today in reference to proposal (Release No. IC-31933) titled Use of Derivatives by Registered Investment Companies and Business Development Companies that proposes a new exemptive rule under the Investment Company Act of 1940 designed to address the use of derivatives by ETFs. I urge the commission to consider the positive impacts that Daily Leveraged and Inverse ETFs can have in an investment portfolio.
First and foremost, these products meet their clearly disclosed daily objective. The inefficiencies of the daily reset are not unique to this structure but are inherent in any form of leverage. Limiting the use of leveraged and inverse ETFs will not prevent the application of trades subjected to the volatility paradox by hedge funds, but will substantially handicap the ability for other asset allocators to expand the outcomes offered to our clients. The cost of leverage has been democratized by these ETFs since 2006 and I believe intelligent investors have benefitted from their utilization.
Furthermore, I am concerned that if these were no longer available in the ETF structure, investors for whom traditional leverage is cost prohibitive will have turn to the structured product and ETN market. This would be a step backward in my opinion, in that these products are often opaque and obscure higher fees. Investors, like myself, want a liquid, transparent and cost effective way to express leveraged and/or inverse opinions. The ETF structure is uniquely designed to provide those benefits, but if that was no longer available, I fear investors will turn to less efficient and less client friendly products.
I am supportive of mandating further disclosure and education, but I request that the commission consider the benefits the ETF structure provides leveraged and inverse investors. Further, I have serious concerns about the unintended consequences of limiting the use of derivatives in ETFs could pose for investors.