Please do not restrict the right to invest in leveraged ETFs.
I have a PhD and have published in economics journals, so I have some expertise in this area.
Investors are currently allowed to borrow up to 50% of the value of their investments, so it is already possible to achieve leverage through these vehicles. But when the value of those investments fall it can lead to margin calls that require investors to sell exactly when the market is already under selling pressure.
In contrast, leveraged ETFs simply decline in value and do not force a sale. This makes them safer than the alternative, both for the investor and for the market as a whole.
In addition, leveraged ETFs allow retail investors to achieve leverage with reduced costs compared to margin loan rates. So this is another way they alleviate risk. Lower costs mean a forced sale is less likely.
I can understand the need for a stronger requirement for investor proficiency for swaps, futures, and options, where the leverage achievable is so high that it can be a real danger to someone who does not understand the risk.
But for leveraged ETFs, you are essentially trusting professionals who understand the risks of swaps, futures, and options to create products that allow retail investors to access lower and fixed leverage rates with less cost and less risk. This is definitely a win-win scenario.
I strongly urge you not to increase the regulatory burden on these products.
James Fowler Comment On Regulatory Notice 22-08
Please do not restrict the right to invest in leveraged ETFs.
I have a PhD and have published in economics journals, so I have some expertise in this area.
Investors are currently allowed to borrow up to 50% of the value of their investments, so it is already possible to achieve leverage through these vehicles. But when the value of those investments fall it can lead to margin calls that require investors to sell exactly when the market is already under selling pressure.
In contrast, leveraged ETFs simply decline in value and do not force a sale. This makes them safer than the alternative, both for the investor and for the market as a whole.
In addition, leveraged ETFs allow retail investors to achieve leverage with reduced costs compared to margin loan rates. So this is another way they alleviate risk. Lower costs mean a forced sale is less likely.
I can understand the need for a stronger requirement for investor proficiency for swaps, futures, and options, where the leverage achievable is so high that it can be a real danger to someone who does not understand the risk.
But for leveraged ETFs, you are essentially trusting professionals who understand the risks of swaps, futures, and options to create products that allow retail investors to access lower and fixed leverage rates with less cost and less risk. This is definitely a win-win scenario.
I strongly urge you not to increase the regulatory burden on these products.