ETF Trading Tools Don’t Need Fixing

DUST is an inverse gold fund that essentially is a bet that gold prices will fall. That has proved to be a bad bet this year as gold prices have risen more than 20%. DUST itself is down 92% year-to-date. But of course, no informed investor should have been holding the fund since the beginning of the year—DUST is not designed as a buy-and-hold investment.

DUST is a trading tool, one with a recommended holding period of maybe a day or two, or a week at the very most. And it appears that those who buy DUST are doing just that.

The fund has $324 million in assets under management, and it traded on average some $170 million a day, meaning more than half of its total assets trade hands every day. The buy-and-hold SPY, for comparison, sees about 10% of its AUM traded every day.

Some Wander Into Trouble

Sure, there are naive investors who go into a fund like DUST, or the VelocityShares 3x Long Crude Oil ETN (UWTI), which also sees half of its AUM trading hands every day, and park their money there just to discover that wrong price action and the effects of daily resets, contango and decay have eviscerated their investment.

But the problem with these investors is not the product, but their own doing. They are often hooked by the idea that they will get triple the returns if the bet works, but they don’t really understand how an inverse daily-resetting fund works.

On The SEC Radar

Late last year, the SEC began placing these kinds of funds in its crosshairs. Its concern is not that these products are flawed, but that investors may be wandering into these trading tools not understanding what they’re doing. There have been internal discussions and proposals at the SEC about reining in these kinds of funds, which could ultimately take away a trading tool that more people than not are using properly.

The fact is the SEC approved the use and launch of these type of funds and have continued to do so. Reports of naive investors getting burned by them have become a bigger concern for the regulatory agency than their value to traders, which is a mistake.

Sure, the SEC believes part of its mission is to protect investors, but that should not come at the expense of traders who need a tool like DUST either for a hedge or a bet of some sort.

A Fool And His Money …

So the question becomes, what is the role of the government in protecting someone from how they may misspend their money?

In 2014, more than $70 billion was spent in this country on state-sponsored lottery games, which the federal government has turned a blind eye to. Could there be a worse way to spend money than betting on some numbers that have astronomical odds of becoming winners?

I can’t imagine there are many advisors who recommend using leveraged and inverse ETFs for their retail clients. These are trading tools for the trading professional, and advisors by and large know that. But many do-it-yourself investors might jump in anyway.

Just last month, MarketWatch ran a story about how the leverage ETF UWTI had become a favorite of millennials trying to capitalize on the steady rise in oil prices this year. If these same investors had used a nonleveraged oil fund like the United States Oil Fund LP (USO | B-100), they would be up nearly 8% year-to-date instead of down 9%.

Charts courtesy of StockCharts.com

My guess is that these young investors were not glued to a Bloomberg watching real-time pricing data of the fund, and that many lost more money than they were ready for. Worse yet, many probably didn’t fully understand the leveraged strategy, and how it’s designed to work.

But is that the government’s concern? No, it isn’t. Caveat emptor.

Drew Voros is Editor-in-Chief of ETF.com. At the time of writing, he owned none of the securities mentioned. Drew can be reached at [email protected].