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SEC moves to kill leveraged ETFs
11 responses

Wow, I really hope this doesn't happen.

I'm pretty sanguine about it; if you just need 3x, you can still use IB margin, and if you need more, soon (I hope) we can trade futures on Quantopian and that will give you more US equity beta than you'll ever want.

Initial margin is 50%, so the max leverage you can start with is 2x. (I know maintenance margin is 25%, but for me initial margin is the important one).

Im not really a leveraged ETF trader, but they do perform well in my range trading systems. More importantly, just knowing the option is there is satisfying.

Yeah, I meant assuming that they keep 150% LETFs, you could hit 3x.

Were this to go through, do you think it would affect leveraged ETNs (e.g. UWTI)?

Technically they're not funds and don't hold anything so it shouldn't apply. Perhaps these would be more along the lines of the "structure" Dave Nadig referenced for which these proposed restrictions are irrelevant?

I would expect those to be affected, personally.

In your opinion, what risk does it create for those who have long/short positions in leveraged ETFs? I personally have short positions in UWTI/DWTI/UGAZ/DGAZ, not sure if i have to stop trading them and wait for more certainty...

Personally, I think they are most likely to permit these type of geared funds, but will now implement new limits on the type of investors who can deploy them. Such funds are no more risky than options trading, so why not set the same rules to those as to options trading? Whoever is approved for options trading can also purchase those funds. Which will mean that they will not longer be available to retirement funds / iras and the bulk of the trading public. (IRA investors for example can buy call or put options but cannot sell them.) This will greatly affect their profitability to the companies creating them, as volume would drop dramatically.

That said, if I owned one of these positions, I would not be in a hurry to close them out. I think we will see a maelstrom of resistance to the regulations, and the finance sector pretty much calls the shots in both the Democratic and Republican parties. So they may come to pass, but it may be over a year before that happens.

This is a textbook example of a solution in search of a problem. I can't think of any event that would prompt such regulations, other than some people have lost money trading LETFs. If the SEC banned all securities in which some people or organizations have lost money, there would be no markets.

I like using 3x ETFs as an easy way to get leverage, as well as providing a way to go short (inverse the market) without a margin account.

That said, if these new rules reduce risks of ETF liquidity problems during market panics, I could be convinced they are a good idea.

From my understanding, the SEC felt that the description of the LETFS was misleading to investors who would buy these thinking they didnt deviate from their index.

I imagine the ETNs will fall in the leveraged category.

From what it sounds like, leveraged ETFs will still be permitted, but they will also come with a nice fancy K-1 at the end of the year resulting in liquidity problems as any advisor will be forced to abandon to not piss off clients.