NEW YORK (
) -- A few weeks ago I was on "Street Signs" for a segment about income investing. I got a good teasing from friends for saying "maybe you don't get it" in response to Herb Greenberg's protestations to the contrary throughout the segment.
Fast forward to this week and his witch hunt of ETFs. As much as he knows what questions to ask about individual stocks, I don't think he is asking the right questions about ETFs. This matters because I think he bends a lot of ears, but asking the wrong questions does not advance the conversation.
Maybe levered and inverse funds should have a cigarette-like warning on them but to the segment the other day and the question what purpose do they serve, they serve the same purpose as many other investment products: hedging and speculation and people use them for both. Hedging and speculating are neither bad nor good but are instead suitable or unsuitable based on the knowledge and tolerance for the end user. This is no different than other products.
If someone speculates with an option, they take on the added element of being wrong by a day causing the entire bet to go to zero -- meaning the catalyst doesn't occur until one day after expiration.
If someone speculates with a margin account they take on the element of being too leveraged into a massive and fast decline resulting in negative equity. This means after selling you out like a margin call, you owe the brokerage firm more money.
The levered and inverse fund may be of no use to you at all, but does that mean they should not exist? The only ones that should not exist are the ones that are not of any use to anyone. Whether or not the warnings that get slapped on them need to be toughened or people should fill out some sort of options paperwork is a different conversation entirely than what purpose do they serve and should they be abolished.
There is far more leverage with options and futures contracts but for some reason there are not calls to eliminate them.