Why I Hate Leveraged ETFs

Here’s a new filing for leveraged Bitcoin ETFs:

Boom–> NYSE files to list leveraged Bitcoin ETFs, many flavors incl 2x and -2x, here’s full list, h/t @fintechfrank pic.twitter.com/XGiX1mzq0O

— Eric Balchunas (@EricBalchunas) January 6, 2018

Yikes. Now, some people might be inclined to say “who cares, if people want to gamble and buy crazy speculative assets then so be it!” I understand that mentality, but I loathe so much of what I see on the product development side of ETF products. Let me explain.

The financial markets were created for real economic purposes. Stocks and bonds, for instance, were created so that companies could raise capital so they could expand their operations. Stocks and bonds also give the public a fairly low risk way to allocate their savings in a public and transparent market. Options and futures contracts were created so that companies could hedge the price volatility of their products and operations. These are necessary and very valuable economic needs.

Over time, the financial markets have become less about serving the real needs of corporations and more about serving the profit needs of Wall Street. And Wall Street pumps this message out every day taking advantage of our behavioral biases selling you the false dream of a get rich quick scheme in the markets. After all, if they told you to diversify, be less active, think more long-term, etc. they would likely make less money. There is an inherent conflict of interest in the profit model of Wall Street and many of the products they offer. The result of all of this is that the financial markets look a lot more like a casino these days than an exchange for raising capital, hedging operations and allocating savings.

As I’ve explained before, investing (or allocating one’s savings) is very different from gambling. Allocating savings in the financial markets is involvement in a positive sum game in which the odds are likely to be in your favor over long periods. Gambling is involvement in a negative sum game in which the odds are not likely in your favor over long periods. We know, empirically, that long-term investing in stocks and bonds is a positive sum game with a positive outcome. Endeavors like roulette or day trading, however, are negative sum games that have probable negative outcomes. In other words, any endeavor in the financial markets that involves short-term trading will tend to look more like gambling than investing because the probability of a negative outcome is increased.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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