Have a look at this article. He makes the case as to why leveraged ETFs should not be held over the long term, as I have argued before.
There is a problem with this. Imagine for a moment that all users of leveraged ETFs extinguish their positions daily. There would be no shares to be sold the next morning to those who want to take a position. Where would the shares come from to be bought or sold?
Leveraged ETFs rely on those that will not use them over one day only. They provide the supply/liquidity for everyone else.
Maybe there should be a tiny dividend accrued/paid to holders at the end of each day to equalize for the rebalancing losses. I don’t know for certain, but I suspect that would ruin the economics of running a leveraged ETF. It would add to the daily costs of hedging, which are already significant. But maybe the overall costs would be borne more equitably with dividends corresponding to the hedging interval. It would also deter paired shorting of leveraged ETFs.
But maybe losses for levered speculators is its own best reward. The ability to take levered positions shouldn’t be free; someone trying to do it on his own would incur costs.
It’s paternalistic, but maybe these products should be barred on public policy grounds. On net, they guarantee losses to holders. If people want to construct these strategies themselves, and bear the costs explicitly, fine. But to have the costs borne implicitly by fools is another matter.
We limit market leverage partly for systemic reasons, but also because it prevents people from harming themselves. As for me, I would not object if the regulators eliminated leveraged ETFs. They serve no long-term useful purpose.