When my editor alerted me to the news that the SEC recently blocked a set of new, leveraged technology and cryptocurrency ETFs, my first reaction was “I guess we finally know where the line in the sand is.”
Don’t mistake my views here. I am a big fan of 3x leveraged ETFs, and leveraged ETFs in general. I’ve been using them since they debuted. And sort of like other potentially dangerous habits such as alcohol, smoking, firearms, and being a fan of the New York Jets or Washington Commanders, warning labels are a good idea.
In the case of all ETFs, and frankly all SEC-registered funds, the warning labels are the disclosure documents. Unfortunately, it’s safe to assume that the vast majority of investors skip past the fine print.
The industry is way too far gone from a communication standpoint to rein in activity related to those who take risk with bold action. Long gone are the days when we used to buy mutual funds through “check and app,” which meant you literally wrote a check.
And that was accompanied by an application to buy the fund. You sent it in by mail, and within a couple of weeks, you received proof of ownership of your shares.
Fast-forward to today, when the subject of this SEC concern is, in some cases, investing in assets that are not even visible, physical assets. Just because it is called “Bitcoin,” it doesn’t mean there’s something you can hold in your hand.
So while it is very reassuring to see that not every single ETF application is a rubber stamp situation, what’s really the point here?
That when it comes to exotic ETFs, trading 0DTE options, or anything else that is miles beyond buying and holding blue-chip stocks and bonds, everyone plays a role. And if they don’t play it, shame on them.
Educate Yourself About Exotic ETFs Before You Take the Plunge
The SEC devotes itself to balancing the nature of open markets and capitalism, while ETF providers are in the business of bringing to market what they think investors will want to trade. And as for investors and traders? They have plenty of places (including Barchart.com) to educate themselves on the ins and outs of complex funds.
Still a few words of guidance to those who are intrigued by the hoard of existing leveraged ETFs available. First, position sizing is extremely important. If something moves 3 times as fast as the normal version of an investment in that underlying asset, that means investing one-third as much will, on a daily basis, get you roughly the same volatility.
Walk, Don’t Run, to New Investment Vehicles
And, there’s nothing wrong with sampling the merchandise before you go “all in” on these. I use 3x leveraged ETF very frequently. But I’ve been doing this a while (like my whole career). So leverage is not exciting to me, merely useful and strategic. Investors of all skill sets and experience should strive for that. Not the thrill of trying to “crush it” in crypto because unleveraged products don’t deliver enough of an endorphin rush.
When I am using a leveraged ETF for the first time, I literally will buy as little as one share. I just want to see how it moves, how it charts, and how I react when it goes against me.
This is just scratching the surface. But news like the SEC’s latest fund rejection is really a metaphor for the topic I care most about as an investor: prioritizing risk management.
Rob Isbitts, founder of Sungarden Investment Publishing, is a semi-retired chief investment officer, whose current research is found here at Barchart, and at his ETF Yourself subscription service on Substack. To copy-trade Rob’s portfolios, check out the new Pi Trade app.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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