Posted by lae2 on June 26, 2009 at 10:13:23:
Wall Street and Capitol Hill are seemingly annoyed with leveraged ETFs. There is talk of protecting the stupid retail investor against these instruments.
Anytime government tries to protect people from themselves there is a moral hazard. You just create more fish and bring out more predators.
Leveraged inverse ETFs are a great instrument for the retail investor. So much so that to the extent regulations are aimed at restricting these instruments is to the extent that I smell a rat. Inverse ETFs allow the retail investor to protect profits and manage tax considerations without taking on the infinite risk of going short.
A simple short sale is potentially way more destructive to the retail investor than is an inverse ETF. Inverse ETFs level the playing field in favor of the retail investor. An inverse leveraged ETF allows the retail investor to take their account to neutral for as 33% the value of the account. Restricting these instruments is a move against the retail investor and secures the turfs of private equity firms and Wall Street.
Regulations should not be based solely on the observation that Human Beings are fundamentally lazy and stupid. You just encourage more laziness and more stupidity. Ultimately, this is great for the predators and bad for the retail investor.