I have been using index Inverse Leveraged ETFs (I-LETFs) as a portfolio hedge, given that my single stock positions can be volatile, and that my portfolio is not correlated with the indices I inverse.
I use I-LETFs in my active trading account, not in my long term investment account.
The I-LETFs are usually under 10% of my portfolio--I rebalance my I-LETF exposure almost daily, to counteract the decay effects of the LETF's daily "buy high sell low" rebalancing. That is, I trim on days the I-LETFs gain and add when they lose, such that I-LETFs comprise a steady % of my portfolio.
I arrived at this practice after major losses on volatile stocks during the China trade war volatility a few years ago (which almost turned my away from the stock market altogether).
I arrived a this strategy after much reading from various perspectives: FINRA's and SEC's websites; my brokerage's (minimally useful) and other brokerage's (more informative) websites; online publications and blogs like SeekingAlpha, Wealth of Common Sense, Alpha Architects, and Investopedia; scholarly articles in Journal of Portfolio Management, Managerial Finance, and SSRN (unpublished papers)
I have also read lecture notes by economists at my undergraduate alma mater UChicago, notes which were available to non-econ/business alum.
Tristan Yates, in his critique of LETFs, notes, "..doubling a string of daily returns is not the same thing as doubling the annual returns, so investors should not expect that level of performance, unless they somehow rebalance their portfolios every single day."
I don't invest in long LETFs, but the same applies: as mentioned above, I rebalance my exposure to I-LETFSs most every day.
I recognize, per Shun (2011), that even rebalancing daily may not prevent deviation from benchmarks, because of management factors as well as trading/interest costs.
These are risks I am willing to take--the costs Shun (2011) describe are far less than, e.g. the 7-8% interest rates my broker would charge me if I carried a margin balance.
(I am not a high net worth individual with high margin balances that garner low interest rates from my brokerage).
I also recognize that my approach may not be fully sound, and am constantly seeking to improve.
I find it galling that FINRA thinks it should decide what's best for me. I read investment-related works at least three hours a day, and have advanced degrees from first tier programs in my fields--but DO NOT think anyone should HAVE TO read that much to invest in "complex" stock market products: part of what makes markets interesting is it brings in all kinds, and can reward (or punish) people who do (or don't) put in the work
I say this fully aware of UChicago econ professors who argue punishment is much more likely than reward (and who complain that most of what Wall Street does is not useful for their clients--but whose complaints are not taken seriously by FINRA).
I don't have a finance degree, but I hope that a finance education, and a finance-based exam, is not a barrier to entry.
Similarly, I am not a high net-worth individual, but to have that preclude my participation in "complex" products is insultingly nanny-state-ish, akin to the limits Singapore places on how much its citizens can gamble in casinos.
I can freely lose my life savings at the roulette table in Boston Wynn Encore casino, but may be deemed not wealthy enough to participate in "complex" financial products--presumably because with the latter, "complex" products, I may not "realize" I am gambling.
This is unduly nanny-ish to those who don't realize they are gambling, and very unfair to non-finance, non-wealthy people who DO spend time understanding the "complex" financial products.
In fact, I have a casino on my phone--my crypto account, about which I worry far more than I do about my investments in "complex" products, given the difficulty of reading deeply about various coins.
I'm still displeased I let the hype get to me, and have a few months of rent invested in various crypto coins I know little about: Professor Gensler's lectures, taught me very little about Dogecoin or Axie Infiity, but I am allowed to pour my life savings into them because FINRA/Elon Musk/Mark Cuban regard them as "non-complex" investments. rather than as casino gambles...
Similarly, I worry more about my investment in start ups on sites like SeedInvest and Republic.co--where the $2000 limit for non-high net worth individuals, while unfair, at least makes some sense--it's very hard to read deeply on these startups.
By contrast, any investor/trader can read deeply on the "complex" financial products FINRA is attempting to regulate.
If investors/traders choose not to read deeply, and choose to treat these "complex" financial products like they would Dogecoin or Roulette, that's their prerogative--please do not penalize those of us who have read deeply, on account of those who haven't.
To conclude, please do not restrict full participation in markets to financial professionals and the wealthy.
James L Comment On Regulatory Notice 22-08
I have been using index Inverse Leveraged ETFs (I-LETFs) as a portfolio hedge, given that my single stock positions can be volatile, and that my portfolio is not correlated with the indices I inverse.
I use I-LETFs in my active trading account, not in my long term investment account.
The I-LETFs are usually under 10% of my portfolio--I rebalance my I-LETF exposure almost daily, to counteract the decay effects of the LETF's daily "buy high sell low" rebalancing. That is, I trim on days the I-LETFs gain and add when they lose, such that I-LETFs comprise a steady % of my portfolio.
I arrived at this practice after major losses on volatile stocks during the China trade war volatility a few years ago (which almost turned my away from the stock market altogether).
I arrived a this strategy after much reading from various perspectives: FINRA's and SEC's websites; my brokerage's (minimally useful) and other brokerage's (more informative) websites; online publications and blogs like SeekingAlpha, Wealth of Common Sense, Alpha Architects, and Investopedia; scholarly articles in Journal of Portfolio Management, Managerial Finance, and SSRN (unpublished papers)
I have also read lecture notes by economists at my undergraduate alma mater UChicago, notes which were available to non-econ/business alum.
Tristan Yates, in his critique of LETFs, notes, "..doubling a string of daily returns is not the same thing as doubling the annual returns, so investors should not expect that level of performance, unless they somehow rebalance their portfolios every single day."
I don't invest in long LETFs, but the same applies: as mentioned above, I rebalance my exposure to I-LETFSs most every day.
I recognize, per Shun (2011), that even rebalancing daily may not prevent deviation from benchmarks, because of management factors as well as trading/interest costs.
These are risks I am willing to take--the costs Shun (2011) describe are far less than, e.g. the 7-8% interest rates my broker would charge me if I carried a margin balance.
(I am not a high net worth individual with high margin balances that garner low interest rates from my brokerage).
I also recognize that my approach may not be fully sound, and am constantly seeking to improve.
I find it galling that FINRA thinks it should decide what's best for me. I read investment-related works at least three hours a day, and have advanced degrees from first tier programs in my fields--but DO NOT think anyone should HAVE TO read that much to invest in "complex" stock market products: part of what makes markets interesting is it brings in all kinds, and can reward (or punish) people who do (or don't) put in the work
I say this fully aware of UChicago econ professors who argue punishment is much more likely than reward (and who complain that most of what Wall Street does is not useful for their clients--but whose complaints are not taken seriously by FINRA).
I don't have a finance degree, but I hope that a finance education, and a finance-based exam, is not a barrier to entry.
Similarly, I am not a high net-worth individual, but to have that preclude my participation in "complex" products is insultingly nanny-state-ish, akin to the limits Singapore places on how much its citizens can gamble in casinos.
I can freely lose my life savings at the roulette table in Boston Wynn Encore casino, but may be deemed not wealthy enough to participate in "complex" financial products--presumably because with the latter, "complex" products, I may not "realize" I am gambling.
This is unduly nanny-ish to those who don't realize they are gambling, and very unfair to non-finance, non-wealthy people who DO spend time understanding the "complex" financial products.
In fact, I have a casino on my phone--my crypto account, about which I worry far more than I do about my investments in "complex" products, given the difficulty of reading deeply about various coins.
I'm still displeased I let the hype get to me, and have a few months of rent invested in various crypto coins I know little about: Professor Gensler's lectures, taught me very little about Dogecoin or Axie Infiity, but I am allowed to pour my life savings into them because FINRA/Elon Musk/Mark Cuban regard them as "non-complex" investments. rather than as casino gambles...
Similarly, I worry more about my investment in start ups on sites like SeedInvest and Republic.co--where the $2000 limit for non-high net worth individuals, while unfair, at least makes some sense--it's very hard to read deeply on these startups.
By contrast, any investor/trader can read deeply on the "complex" financial products FINRA is attempting to regulate.
If investors/traders choose not to read deeply, and choose to treat these "complex" financial products like they would Dogecoin or Roulette, that's their prerogative--please do not penalize those of us who have read deeply, on account of those who haven't.
To conclude, please do not restrict full participation in markets to financial professionals and the wealthy.