Protecting People From Their Own Ineptitude

I’ve already covered the topic of leveraged ETF misconceptions, and how it requires neither advanced math degrees from scientific schools to understand, nor hours of studying a prospectus filled with legal-ese to get the necessary information.

Felix Salmon, this weekend, tackled the issue, concluding (emphasis mine):

“Given how many people are clearly Doing It Wrong when it comes to TBT, I think there’s a strong case for the SEC to step in here and take a very hard look at TBT in particular, and levered ETFs in general. If day-traders want to day-trade using ETFs, that’s fine — and they can bring their own leverage, if they’re so inclined. But ETFs with embedded leverage are clearly being bought by people who aren’t day-traders at all, and who have no business buying these securities. It’s the SEC’s job to protect those people. It should get on the case.”

Now, the point of my prior post on this subject is that it’s the SEC’s job to make sure that investors have the information that they need to make informed decisions, and I think that investors DO have such information.  The Analyst at Stone Street Advisers wrote a reply to Felix’s post, and I think his conclusion is eloquently phrased:

“Ultimately, the question we must ask ourselves is whether we want regulators to protect us from predatory and unethical behavior from issuers, brokers, and other Wall Street interests seeking to profit from illegal asymmetric information, or do we want them to protect us from our own laziness, naivete, and ineptitude.”

So, if the details of $TBT, $SDS, $SKF and others are buried in the fine print on page 159 of a 450 page prospectus, it’s easy to make the case that we should make this information more prominent.   But that’s not the case – the information is there – right up front and in your face.

In my opinion, a more interesting debate is if we should count leveraged ETFs differently in terms of margin requirements.  That’s an offshoot of what Felix was getting at in his post, and the good news is that it’s already happened:

“NASD Rule 2520(f)(8)(A) and Incorporated NYSE Rule 431(f)(8)(A) permit FINRA—in response to market conditions—to prescribe higher initial and maintenance margin requirements. In view of the increased volatility of leveraged ETFs compared to their non-leveraged counterparts, FINRA believes higher margin levels are necessary.”



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