The ProShares Letter: What Does It Mean?

By Adam O'Dell  |  February 13, 2020

I’ve recommended tactically buying shares of the ProShares Ultra QQQ Trust (NYSE: QLD) a number of times.

Tactically means “when warranted,” and that you’re also willing to get out of the shares when taking the additional risk inherent in a leveraged fund isn’t warranted.

I’ve shared with you how my 10X Profits market-timing model helps me determine when a “risk-on” position in QLD is or isn’t warranted. And how, for a long while now, my model has unabashedly been screaming “All Clear” and recommending aggressive risk-on positioning.

That bullish signal led me to recommend QLD at our October 2019 Irrational Economic Summit — QLD is up more than 50% since…

I also shared the recommendation with you on January 8, 2020, as part of my 20 Trade Ideas for 2020 and Beyond series — QLD is up more than 15% since this mention of it in The Rich Investor

To be fair to my loyal 10X Profits readers, they’ve been able to milk a full 79% open profit and growing from our latest QLD trade!

Today though, I want to discuss the Securities & Exchange Commission’s (SEC) recent proposal to put guardrails around leveraged and inverse ETFs.

SEC Proposes Rule to Regulate Leveraged Funds

The agency actually pushed this proposal out in late November last year, though a more recent letter from fund issuer ProShares seems to have caused a stir among shareholders of the company’s funds — including some of my 10X Profits readers, who are indeed shareholders of the ProShares Ultra QQQ Trust (NYSE: QLD), which serves as our primary risk-on investment vehicle.

One 10X Profits reader wrote:

“I just received notice from ProShares that the SEC is considering a proposal to make it much more burdensome, and maybe even impossible, to buy reverse and leveraged funds. This includes QLD. Please comment on this development.

A number of others wrote in with essentially the same question.

So, what’s with this proposal? And is it good or bad for us?

Nothing More Than a Minor Annoyance

Let’s start by assuming that the SEC succeeds at implementing this proposed rule.

That’s not a given, but let’s assume this for now…

Even so, I highly suspect that you will still be able to buy, hold and sell leveraged and inverse ETFs, including modestly leveraged ones (i.e. up to 150%), heavily leveraged ones (up to 300%), as well as all the inverse funds you currently have access to today.

Will your broker require you to fill out an extra form or two, similar to how you had to fill out a 2-page “Options Approval Form” if you sought approval to trade stock options in your account?

Yes, quite possibly.

But that could truly be the worst thing to come of this — a minor and reasonable annoyance, I think we’d agree.

In exchange for offering your assurances — to your broker and the SEC — that you “understand the risks,” you may end up gaining access to a far greater number of ETF products than are viably tradeable today. More on that in a minute.

So, if you’re willing to fill out a form stating you understand the risks involved in leveraged and inverse ETFs products, I doubt the proposed rule, if implemented, will create any issues for you.

To summarize key elements of the proposed rule:

  • Fund issuers would be required to limit leveraged funds to 150% (note: a non-leveraged, vanilla index fund is 100%).
  • Or, funds could offer up to 300% leverage, or inverse tracking of an index, so long as the broker/dealer or registered investment advisor jumps through an additional due diligence “hoop,” essentially making sure their client (you) understands the risk involved in the product.
  • All funds would be required to establish a “derivatives risk management program,” headed by a board-appointed manager.

So again, the proposed rule doesn’t really touch funds that are moderately leveraged, up to 150%… those aren’t going away.

And it doesn’t sound like the 2x- and 3x-leveraged funds (i.e. 200% and 300% leverage) are going away, either. They just want you to affirm that you know what you’re getting into when you buy it — just as they do when you tell them you want to trade a stock option, which, as a “derivative” of common stock, carries with it a different set of risks.

To the final key element, an SEC-mandated derivatives risk management program may cost the fund issuers some money — and they’ll say it’ll cost them a lot of money, even if it doesn’t. Same from broker/dealers and RIAs, who’ll say any due diligence requirement will be costly and unnecessarily onerous to implement.

But in the end, those requirements won’t run anybody out of this business and they’ll at least make the SEC feel like the firms have a better handle on things.

So, who wins and why is ProShares sending you a letter, suggesting you comment to the SEC’s proposal?

This Actually Makes It Easier to Get a Leveraged Fund 

Realize that the proposed rules surrounding leveraged and inverse funds are actually a smaller part of the SEC’s so-called “ETF Rule,” which was passed in September 2019.

The ETF Rule essentially streamlines the process a fund issuer must go through to bring a new ETF to market.

Since 1993, when the first wave of ETFs was approved and marketed, the SEC has approved or denied new applications on what’s been called a “patchwork” basis. Frankly, that means they’ve been flying by the seats of their pants, making it up as they go and forcing fund issuers to jump through an ever-changing and opaque set of hoops for any new fund.

That was a major pain for the early movers in the ETF space, like ProShares, but those issuers who succeeded in navigating the SEC’s approvals mine field snatched up a lot of market share and have since kept many of the little-guy fund issuers on the sidelines.

And perhaps that’s why ProShares has some incentive to resist the recent rule proposals altogether. ProShares has already paid the price of the SEC’s slow and dysfunctional rollout of ETF regulation… it secured a first-mover advantage in an industry that, until now, had a high barrier to entry.

If that barrier is being lowered by the 2019 ETF Rule, and perhaps even more so once the rules surrounding leveraged and inverse funds are resolved… ProShares should be expecting a lot more competition in the years ahead.

And you should expect a much larger selection of quality ETF products to choose from ahead.

In short, I don’t think anyone’s taking away QLD any time soon. And if anything, maybe by this time next year we’ll be reviewing newly-introduced exchange-traded products that complement or improve upon the current generation.

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Adam O'Dell

As Chief Investment Strategist for Dent Research, Adam O’Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with minimum risk. He achieves this with his perfect blend of technical and fundamental analysis.

Tactically, he does extensive back-testing and probability-based research. It’s the ultimate partner to the exhaustive research that Dent Research co-founders Harry Dent and Rodney Johnson do in the exciting realm of the new science of investing.

Adam is also the executive editor of our hugely successful trading services, Rich Investors Club, Cycle 9 Alert and 10X Profits.

He has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high-profit potential.

Aiming to find the best opportunities across all asset classes, Adam expanded into the commodities, equities and futures markets. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. MORE FROM AUTHOR