Ouch! SEC to put the crimp on leveraged ETFs.

Trader13 · Dec 12, 2015

Margins are already higher for leveraged ETPs, reducing the effective leverage to some extent.

ScalperJoe · Dec 14, 2015

lindq said:
So yes, disclosure should be the issue most addressed by the SEC, in the same way that disclosures for options, futures, etc., have been required.

The SEC already requires further disclosures for retail accounts, at least Fidelity makes you sign a separate agreement which identifies the risks of the double/triple ETFs.

Perhaps that will now translate to money managers who will now have to get clients to sign the forms. The issuers of the ETFs already have prominent disclosures on their respective sites that these funds are for DAYTRADING ONLY, and that the actual price may not accurately reflect the NAV. No big deal, business will continue as usual.

Some of the Direxion ETFs are doing mega volume, and Wall Street thrives on commission. Transaction based compensation is the name of the game, it's written in the scrolls.

murray t turtle · Dec 21, 2015

lindq said:
Here is the FTC announcement regarding their proposed rules for derivatives and ETFs/Mutual funds. (They propose to limit use of derivatives.) It will be interesting to see the response from the ETF providers and the financial press.

http://www.sec.gov/news/pressrelease/2015-276.html

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Thanks for the link;
SEC gov usually does good job.90 day comment period[from published date].

IBD now has, for some time an ETF, ETF leveraged section page , in newspaper;
most of them were NOT around in 2008. Good post; better to see it NOW than in the middle of BEAR market.LOL

Apbideas · Dec 24, 2015

Check out this article that discusses: Defending Leverage https://t.co/Xn2wpJ5PO3

murray t turtle · Dec 31, 2015

Apbideas said:
Check out this article that discusses: Defending Leverage https://t.co/Xn2wpJ5PO3

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Good article Apb;
he says remember, investments do NOT lose money- people do.LOL; but true

I've bought real estate with cash + credit[leverage]; some thing to be said for both ways............................................................................................;;
i hope the SEC studies his chart.

Apbideas · Dec 31, 2015

murray t turtle said:
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Good article Apb;
he says remember, investments do NOT lose money- people do.LOL; but true

I've bought real estate with cash + credit[leverage]; some thing to be said for both ways............................................................................................;;
i hope the SEC studies his chart.

Thanks for checking out my article and the feedback...I appreciate it.
I sure hope the SEC listens equally to both sides before coming to a decision.

Apbideas · Jan 23, 2016

Apbideas said:
Check out this article that discusses: Defending Leverage https://t.co/Xn2wpJ5PO3

Here is a chart that helps to visualize the built in hedge that is available with any levered product. The main 1X fund EEM is down 40% over the past several years but its 3X equivalent EDC is only down a little over 80% when it should be down more than 120%. The beauty in these products is that they can't go lower than zero and in fact due to daily rebalancing enjoy an inverse expontential decline when the main ETF drops by more than 33%.

In other words you could have gotten away with investing $333 in EDC rather than $1000 in EEM several years ago and today you would have actually lost less dollars with EDC than you would have with EEM. If you were agressive and had invested $1000 in EDC...you had the expectation of 3X of upside but only suffered 2X of downside. I find the risk/reward ratios very compelling with all levered products based on these concepts.

As with anything in investing as well as in life...don't over do it, be long term and be diversified.

newwurldmn · Jan 23, 2016

Apbideas said:
View attachment 161019

Here is a chart that helps to visualize the built in hedge that is available with any levered product. The main 1X fund EEM is down 40% over the past several years but its 3X equivalent EDC is only down a little over 80% when it should be down more than 120%. The beauty in these products is that they can't go lower than zero and in fact due to daily rebalancing enjoy an inverse expontential decline when the main ETF drops by more than 33%.

In other words you could have gotten away with investing $333 in EDC rather than $1000 in EEM several years ago and today you would have actually lost less dollars with EDC than you would have with EEM. If you were agressive and had invested $1000 in EDC...you had the expectation of 3X of upside but only suffered 2X of downside. I find the risk/reward ratios very compelling with all levered products based on these concepts.

As with anything in investing as well as in life...don't over do it, be long term and be diversified.

The daily rebalancing works both ways. Over time EEM can rally and this lose.

nitro · Jan 24, 2016

I don't understand their point anyway. A trader can mimic exactly what the [leveraged] ETF does "by hand". The reason they don't is that it is expensive on capital to do. Then, the solution isn't to abolish them or to critically crimp them, but to increase margin requirements on "pattern daytrading" accounts.

All that will do ultimately is to drive people to the futures exchanges even more than they do now.

gkishot · Jan 24, 2016

nitro said:
I don't understand their point anyway. A trader can mimic exactly what the [leveraged] ETF does "by hand". The reason they don't is that it is expensive on capital to do. Then, the solution isn't to abolish them or to critically crimp them, but to increase margin requirements on "pattern daytrading" accounts.

All that will do ultimately is to drive people to the futures exchanges even more than they do now.

I think they are just looking for a scapegoat to blame for economic uncertainties. That can lead them to all kinds of irrational decisions.