A New Product Gives Regular Investors Access to High-Powered Hedge Funds
A new product has been launched by Bank of Montreal, allowing regular investors to have the leverage of high-powered hedge funds. The Max SPX 500 4x leveraged ETNs will enable investors to make bets that move four times the direction of the stock market on any given day. This product is the highest leveraged exchange traded product in the U.S. and is based on the S&P 500 Total Return Index.
Retail Investors and Asset Management Firms Show Appetite for Volatile Products
The launch of this 4x leveraged product comes at a time when retail investors and asset management firms are showing increased interest in more volatile products. Single-stock ETFs for major tech stocks, as well as funds focused on zero-day options, have gained traction recently. Many of the biggest ETF shops have also filed with the SEC to create a bitcoin ETF, which is expected to be approved next year.
Preference for Higher Leveraged Funds
Investors have shown a preference for higher leveraged funds like the Direxion Daily Semiconductor Bull 3x Shares (SOXL) ETF. The assets and volumes tend to be more concentrated in these highly leveraged products and volatile sectors, according to Aniket Ullal, head of ETF and data analytics at CFRA.
Short-Term Trading Only
The XXXX notes, like most leveraged products, are designed for short-term trading. The leverage is reset daily, so holding onto the note for a long period of time may not yield the expected return. BMO cautions that these notes are riskier than securities with longer-term objectives and may not be suitable for investors with a “buy and hold” strategy.
Differences Between ETNs and ETFs
There are key differences between exchange traded notes (ETNs) and exchange traded funds (ETFs). While it is rare for an ETN to fail, they do have credit risk, unlike ETFs. ETFs are considered safer because they hold physical securities that are marked to market daily. ETNs, on the other hand, track an index and promise a certain return. The XXXX ETN is an unsecured liability of BMO and will mature in 2043.
Higher Costs and Previous Attempts at 4x Leveraged Products
The XXXX ETN is more expensive than traditional passive index funds that investors use to gain exposure to the S&P 500. It carries an annualized investor fee of 0.95% and may have additional costs associated with daily financing charges or early redemption fees. BMO is not the first firm to offer a 4x leveraged product, as some overseas markets have even higher risk-return products. In 2017, the SEC approved two products from ForceShares, but the launch was quickly paused.
Hot Take: Proceed with Caution
While the new 4x leveraged product may be appealing to some investors seeking higher returns, it’s important to proceed with caution. Short-term trading and a thorough understanding of the risks involved are necessary for those considering this strategy. Additionally, the higher costs and potential credit risk associated with exchange traded notes should be carefully evaluated before investing.
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