Leveraged funds can be very useful for certain goals. There is nothing necessarily optimal about the 1x leverage an investor would obtain using a typical index fund such as SPY. For some investors/situations, less than 1x leverage is better and for others, greater than 1x leverage is better. Hence restricting the public's access to leveraged funds could be detrimental to those whose risk/reward calculations point them towards greater than 1x leverage.
Furthermore, holding a smaller percentage of a portfolio in a leveraged product could allow an investor to hold a larger percentage in cash, which in turn could allow them to more comfortably weather an extreme market drawdown. For example, an investor comfortable with greater market risk might seek to have a portfolio with 40% allocated to a 3x leveraged fund and 60% in cash. This gives the investor 1.2x total leverage while preventing losses greater than 40%.
Another point is that restricting access to leveraged ETFs could lead to more retail investors trading more complex products like options in order to attain the leverage that they deem appropriate for their portfolio. This would be an unnecessary extra layer of complexity and could also potentially mean these investors will have to pay more commissions to trade the options than if they were investing in ETFs (which typically have no fees these days).
Overall, having access to leveraged products allows investors to create individualized portfolios tailoring to their specific risk appetites. It would be a loss to restrict the usage of these products.
Ajay Balaji Comment On Regulatory Notice 22-08
Leveraged funds can be very useful for certain goals. There is nothing necessarily optimal about the 1x leverage an investor would obtain using a typical index fund such as SPY. For some investors/situations, less than 1x leverage is better and for others, greater than 1x leverage is better. Hence restricting the public's access to leveraged funds could be detrimental to those whose risk/reward calculations point them towards greater than 1x leverage.
Furthermore, holding a smaller percentage of a portfolio in a leveraged product could allow an investor to hold a larger percentage in cash, which in turn could allow them to more comfortably weather an extreme market drawdown. For example, an investor comfortable with greater market risk might seek to have a portfolio with 40% allocated to a 3x leveraged fund and 60% in cash. This gives the investor 1.2x total leverage while preventing losses greater than 40%.
Another point is that restricting access to leveraged ETFs could lead to more retail investors trading more complex products like options in order to attain the leverage that they deem appropriate for their portfolio. This would be an unnecessary extra layer of complexity and could also potentially mean these investors will have to pay more commissions to trade the options than if they were investing in ETFs (which typically have no fees these days).
Overall, having access to leveraged products allows investors to create individualized portfolios tailoring to their specific risk appetites. It would be a loss to restrict the usage of these products.