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.
leveraged ETFs. Never used one and do not plan to. I see no reason to do away the 2X or 3X ETFs. It is likely a better chance than the lotto and perhaps on par with roulette. If you kill leveraged ETFs, then what about calls and puts on ETFs? The ripple would go all over the place.
The fool an his money is soon parted. You may be able to change the method, but not the end result.
As long as there is no misrepresentation or deception, I see no reason to stop it. I have not need for the product, but think the willing and informed buyer and sell should be able to trade them. In this case less government is better.
You’re probably right, but we place leverage limits on many things, impose suitability requirements, etc. We could go to something where “no holds are barred,” and I guess I could be happy with it, but the thing that kicked me over the edge here was realizing that there had to be long-term holders for the product to work, yet anyone who is a long-term holder will lose.
Maybe a warning label should be placed on it — Warning: The SEC has determined that buying and holding leveraged ETFs will be hazardous to your wealth.
Or, an ad campaign: Friends don’t let friends buy and hold leveraged ETFs.
Or maybe, write some blog posts on it. Yeah, that could do it.
[...] The case for eliminating leveraged ETFs. (Aleph Blog) [...]
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Leveraged eggs do a great job of delivering exposure efficiently to investors. I hate this routine where we try to exclude people who we think are too simple to understand them. Does anyone really understand why GLD is up or down? Let’s ban that too. What about buying insurance? Does anyone really have a good enough grip of their mortality odds to speculate against a bunch of actuaries? Or what about long bond funds? Most people don’t know how to look at convexity!
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And one minor correction. Leveraged etfs, just like regular ones, have market makers offering them. Sell them all you want.
That may be, but if only the primary market is offering, liquidity is diminished.
[...] The case for eliminating leveraged ETFs. (Aleph Blog) [...]
You could say the same thing about calls. Over the long run the retail of buy and holding calls is a loss.
However, Friday I sold several covered calls and may soon look to buy them back for half of that.
It is not just the call or ETF, it is part of a strategy.