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>>> The Feds Want To Take Some Of Your ETFs Away


Investor's Business Daily

MATT KRANTZ

02/06/2020


https://www.investors.com/etfs-and-funds/etfs/inverse-etfs-feds-want-take-some-etfs-away/?src=A00220&yptr=yahoo


Can you handle leveraged and inverse ETFs? You might think so, but regulators want to be sure.

The Securities and Exchange Commission is proposing new limits on leveraged and inverse ETFs — potentially cutting off investors' access to these tools used to control returns. Rules announced in late 2019, if finalized, would require brokers and advisors to ask a variety of questions before selling these ETFs to investors.

Answers to the questions determine if the investor understands the risk. Leveraged ETFs use options and derivatives to amplify returns either on the upside or downside. Inverse ETFs use derivatives so their value moves opposite of the primary index.

If used properly, these funds can boost returns or temper volatility. If used incorrectly, they can amp up volatility. There are more than 250 leveraged ETFs in the U.S., says Morningstar Direct.

Some think more regulation, if adopted, will put these ETFs out of reach for many.

"We are concerned that some investors could be prevented from buying these products by an overly burdensome qualification process," Michael Sapir, chairman of leading leveraged ETF seller ProShares, told Investor's Business Daily. "Some brokerage firms could even stop offering these funds altogether given the complexity of implementing the regulations."

ProShares emailed all its clients this month urging them to voice their opinions on the rule. The SEC could not be reached for comment.

Curious Timing Going After Inverse ETFs

The SEC's move to control leverage and inverse ETFs now is a head-scratcher, says Ben Johnson, head of ETF research at Morningstar. Leveraged and inverse ETFs have existed for more than 15 years.

Sapir agrees. "It is hard to see why the SEC is making this proposal now, especially since the proposal doesn't actually show a real problem that needs to be solved," he said.

For instance, the nearly $2 billion in assets ProShares Short S&P 500 ETF (SH) launched more than a decade ago, in June 2006.

"I liken the SEC's proposal to going to shut the barn door after the horse has bolted only to find that someone else has already shut the door," Johnson said. "After widespread misuse of these funds years ago, most brokerages and platforms have either disallowed these funds outright or made them otherwise more difficult to access."

Now, most investors who know how to use these funds are using them, he says. "These products seem to have found their natural audience and reached saturation," Johnson said. ProShares is still a market leader but isn't seeing growth in these ETFs, Johnson says. The "ProShares range of leveraged and inverse products ... first hit $21 billion in assets at the end of 2009 and were around that same level at the end of 2019."

Limiting Access To ETFs

The question is whether the new rules would block some investors, who know how to properly use leveraged ETFs, from using them. "The measures the SEC is proposing would put them even further out of reach," Johnson says.

But Todd Rosenbluth, head of ETF and mutual fund research at CFRA, thinks the fans of these ETFs will jump over the required hurdles. He also thinks the SEC is looking to drive home how different these ETFs are from more traditional stock ETFs.

"It's going to make it a step or two harder for people to buy" these ETFs, Rosenbluth says. "But the type of investor that these products appeal to, which are highly tactical and short term in nature, should be comfortable saying yes to a questionnaire."

Largest Leveraged And Inverse ETFs By Assets

ETF Symbol Net Assets ($ billions)

ProShares UltraPro QQQ (TQQQ) $5.12
ProShares Ultra S&P 500 (SSO) $2.91
ProShares Ultra QQQ (QLD) $2.61
ProShares Short S&P 500 (SH) $1.90
Direxion Daily Financial Bull 3X (FAS) $1.59

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