I'm very interested in geared ETFs.
It appears that the highest available gear ratio is 3x the underlying security (or index).
Is this due to regulation, mathematics, or market demand?
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After the 2009 collapse, there were calls to regulate levered ETFs and rebuttals against that position.
The reason why is because especially with the 3x Financials, where the underlying lost nearly 50% in two months, the 3x lost approximately 90%, a well-managed decline considering that
0.5^3 is a nearly 90% loss, so it fulfilled its objective to get 3x the geometric return of the underlying. They are not intended to amplify arithmetic returns, so a 50% loss will not wipe the levered fund out, only incompetence.
After those calls for regulation, Direxion called it quits on expanding its offerings which were to include a 10x set of ETFs.
The real risk of a levered ETF is that it may not achieve its goal of geometrically amplifying an underlying's return, thus if one is using a -3x to hedge underlying, a generally effective strategy at reducing volatility, then a long run hedge will break down because a single day's return is ignored the next day since these are daily levered funds. There were plans to offer monthly return so that errors could be corrected, but they were also stopped in their tracks by the calls for regulation.
Here, there is no doubt that just the mere threats of regulation have hurt the little guy's, such as myself, ability to hedge.
There is no fundamental reason that you don't find ETF's that proclaim to offer more than 3x leverage in the US capital markets.
Given that it is quite simple to get A LOT more leverage, or for any trader create more than 3x leverage synthetically, there is surely market demand for greater leveraged products.
Mathematically, a 3x leveraged ETF structure will lose all of its value if the underlying asset declines by 33% in one day. So a 4x and a 5x leveraged ETF will be subject to greater shocks making their value drop to zero with smaller percentage moves in the underlying asset, dampening investor and trader confidence in those products, since people will rather fight tooth and nail before actually reading a prospectus.
From a regulatory standpoint, the Securities and Exchange Commission (SEC) and culture in the United States still retain an arbitrary moral weighting drawing a distinction between investing and gambling where there frequently is none. As such the will of the people extends to a regulatory framework that also weighs financial products based on their similarities to gambling. So the SEC will take pause to more and more extreme publicly traded financial vehicles, if they are all introduced at once. The SEC has to be gradually coaxed to approve the latest and greatest "hedging tool for daytraders". Even though the SEC does not officially evaluate the merit of an investment or a financial product, they still have a great degree of discretion in approving what trades.