Devin Wilkinson Comment On Regulatory Notice 22-08
Devin Wilkinson
N/A
The restriction of investment in non-traditional stocks and bonds is a driving force in making the investment playing field unlevel between the regular Americans and HNW individuals/institutions. There is no benefit by limiting the playing field to the average American, and reduces the ability of wealth creation along with hedging abilities that HNW individuals have.
Inverse and leveraged ETFs not only allow the potential for outsized returns that can build wealth, but also provide hedging and learning opportunities important in creating an equal playing field, something I believe to be an important principle to the U.S.
Most hedge funds run on a leveraged basis in excess of the 3x that many ETFs provide. These ETFs allow portfolio diversification by investing a smaller amount in leveraged equities combined with safer investments in fixed income that allow market returns with an enhanced cash flow profile and ability to take advantage of large market drawdowns, by shifting fixed income assets into equities at those times. Without leveraged ETFs many Americans are limited to market returns during the good times and then can not take advantage of market downturns because full investment was required to achieve market returns.
This can be argued to be more risky then having a portion of an account in leveraged ETFs, explained in the below example.
Leveraged ETFs with $1,000 Portfolio:
33.3% in a leveraged etf at 3x will give an investor close to the returns of a fully invested $1,000 (this will be slightly less due to some volatility decay). Combine this with some treasury securities for the remaining 66.6% you now have cash flow (hedges against volatility decay) and a safe asset that generally goes up in value in times of turmoil (interest rates decrease means higher value of fixed income, generally in turmoil interest rates fall from federal reserve action). This means that in the event of a crash or poor market an investor would lose the approximate same dollar value of the $1,000 portfolio (3x the % loss), but would be able to buy equities during the sell off using the increased value of the fixed income and the cash flows from them. The allocation to safer assets also allows an investor to take part of the non-impacted safe securities in a time of liquidity need, rather than the sell equities at a loss. This results in an overall safer portfolio compared to the below 100% invested portfolio.
Non-leveraged ETF portfolio $1,000:
In this example an investor would need to fully invest the $1,000 into the market in order to achieve market returns, leaving no room for safer investments like bonds or cash.
In the event of a market downturn the whole $1,000 would have gone down in value and it the investor has no cash flows (outside of some dividends potentially) or safer assets to move into equities in order to take advantage of the market downturn. This excludes the investor from taking advantage of advantageous buying opportunities, and exposes them to having to sell during downturns for liquidity needs. Having to sell during downturns is the largest destroyer of wealth, which has been seen through numerous studies.
By disallowing leveraged ETFs individuals are forced to choose between below market returns on their assets (by holding cash/treasuries and reducing the amount of market exposure) or being fully invested which is a risky situation for liquidity needs.
Inverse ETFs serve as one of the only ways common investors can hedge at all. Regulation already severely restricts options and short selling to common investors which both serve as adequate hedging vehicles. By taking away inverse ETFs FINRA would be taking away any ability for invertors to hedge outside of selling equities (large tax implications and not a very viable hedge for most due to this). This is FINRA taking away any defense investors could have against large drawdowns, leaving them completely vulnerable to the market and no recourse.
In summary leveraged and inverse ETFs are a vital resource for common investors to reduce risk and increase opportunity and serve as one of the last ways for investors to hedge and diversify. The exclusion of these would be a large blow to common Americans and significantly unlevel the playing field, something the U.S. was built on.
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Devin Wilkinson Comment On Regulatory Notice 22-08
The restriction of investment in non-traditional stocks and bonds is a driving force in making the investment playing field unlevel between the regular Americans and HNW individuals/institutions. There is no benefit by limiting the playing field to the average American, and reduces the ability of wealth creation along with hedging abilities that HNW individuals have.
Inverse and leveraged ETFs not only allow the potential for outsized returns that can build wealth, but also provide hedging and learning opportunities important in creating an equal playing field, something I believe to be an important principle to the U.S.
Most hedge funds run on a leveraged basis in excess of the 3x that many ETFs provide. These ETFs allow portfolio diversification by investing a smaller amount in leveraged equities combined with safer investments in fixed income that allow market returns with an enhanced cash flow profile and ability to take advantage of large market drawdowns, by shifting fixed income assets into equities at those times. Without leveraged ETFs many Americans are limited to market returns during the good times and then can not take advantage of market downturns because full investment was required to achieve market returns.
This can be argued to be more risky then having a portion of an account in leveraged ETFs, explained in the below example.
Leveraged ETFs with $1,000 Portfolio:
33.3% in a leveraged etf at 3x will give an investor close to the returns of a fully invested $1,000 (this will be slightly less due to some volatility decay). Combine this with some treasury securities for the remaining 66.6% you now have cash flow (hedges against volatility decay) and a safe asset that generally goes up in value in times of turmoil (interest rates decrease means higher value of fixed income, generally in turmoil interest rates fall from federal reserve action). This means that in the event of a crash or poor market an investor would lose the approximate same dollar value of the $1,000 portfolio (3x the % loss), but would be able to buy equities during the sell off using the increased value of the fixed income and the cash flows from them. The allocation to safer assets also allows an investor to take part of the non-impacted safe securities in a time of liquidity need, rather than the sell equities at a loss. This results in an overall safer portfolio compared to the below 100% invested portfolio.
Non-leveraged ETF portfolio $1,000:
In this example an investor would need to fully invest the $1,000 into the market in order to achieve market returns, leaving no room for safer investments like bonds or cash.
In the event of a market downturn the whole $1,000 would have gone down in value and it the investor has no cash flows (outside of some dividends potentially) or safer assets to move into equities in order to take advantage of the market downturn. This excludes the investor from taking advantage of advantageous buying opportunities, and exposes them to having to sell during downturns for liquidity needs. Having to sell during downturns is the largest destroyer of wealth, which has been seen through numerous studies.
By disallowing leveraged ETFs individuals are forced to choose between below market returns on their assets (by holding cash/treasuries and reducing the amount of market exposure) or being fully invested which is a risky situation for liquidity needs.
Inverse ETFs serve as one of the only ways common investors can hedge at all. Regulation already severely restricts options and short selling to common investors which both serve as adequate hedging vehicles. By taking away inverse ETFs FINRA would be taking away any ability for invertors to hedge outside of selling equities (large tax implications and not a very viable hedge for most due to this). This is FINRA taking away any defense investors could have against large drawdowns, leaving them completely vulnerable to the market and no recourse.
In summary leveraged and inverse ETFs are a vital resource for common investors to reduce risk and increase opportunity and serve as one of the last ways for investors to hedge and diversify. The exclusion of these would be a large blow to common Americans and significantly unlevel the playing field, something the U.S. was built on.