‘Is this a stock market, or a casino?’ New 4X leverage S&P 500 ETN met with caution

By José Adinolfi

An exchange-traded product that allows investors to place massively leveraged bets on the S&P 500 launched Tuesday, according to a news release from sponsor Bank of Montreal.

It's called MAX S&P 500 4X Leveraged Exchange Traded Note XXXX and it will offer investors four times the daily returns of the S&P 500 Total Return Index. The fund's sponsor, Max ETNs, already offers four other leveraged ETNs that offer triplex exposure to the airline and automotive industries.

The ETN began trading Tuesday on NYSE Arca using the symbol "XXXX."

The product's backers heralded it as an "innovative tool" for investors.

“With the launch of these 4X leveraged ETNs, we continue to foster a diversified and dynamic investment landscape,” said Adam Stempel, managing director of BMO Capital Markets, in a press release. "As investors seek strategies to navigate changing market conditions, we provide access to innovative tools designed to meet their diverse needs."

Others were quick to express surprise that a product like this was allowed after the Securities and Exchange Commission ultimately blocked two 4X leveraged products proposed by ForceShares in 2017.

Although the SEC initially approved a rule change that would allow 4X leveraged ETFs, the agency ultimately decided to reconsider, according to a report from Barron's.

One thing to note: XXXX is not an ETF, it is an ETN, which technically makes it more similar to a debt instrument than a stock. Todd Sohn, ETF analyst at Strategas Securities, told ETF.com that this could have allowed XXXX to circumvent SEC rules regarding leveraged ETFs. Representatives for the SEC and BMO did not immediately respond to MarketWatch's requests for comment.

In the ETN prospectus, BMO highlighted that the product is designed for short-term trading by sophisticated investors.

"Notes are riskier than securities that have medium- or long-term investment objectives, and are not suitable for investors who plan to hold them for a period other than one day or who have a 'buy and hold' strategy." the prospectus said.

"Investors should actively and continually monitor their bond investments, including intraday. They may suffer significant losses on bonds even if the long-term performance of the index is positive," the prospectus says. "Extreme caution should be exercised when considering an investment in the bonds."

In 2017, Joe Saluzzi, partner at institutional broker Themis Trading, spoke with Barron's about the prospect of 4x leveraged ETFs.

"At some point, the SEC has to come in and say, 'Enough is enough.' This is a stock exchange, not a casino," he said at the time.

During a phone interview with MarketWatch on Tuesday, Saluzzi said his comment from six years ago still applies.

"If you're going to go 3x, 4x, why not go 10x? Why not go 100x? What are we doing here? Are we investing or gambling? Is this a stock market or a casino?" Saluzzi said.

After decades on Wall Street, Saluzzi is wary of products that appear to subvert the stock market's intended purpose as a vehicle for companies to raise capital and instead make it look like a casino designed to separate unsophisticated investors from the money. that cost them so much to win.

He wasn't the only one to express some dismay at the release. Nate Geraci, president of ETF Store, said in a post on X that it was "[w]"I think grandma will be able to buy a 4x leveraged S&P 500 ETN before a spot bitcoin ETF..."

Veteran Wall Street short seller Jim Chanos, who recently went out of business, made a tongue-in-cheek joke and asked on X if traders could buy the ETN on margin.

No doubt, leveraged products like these are becoming increasingly popular. According to ETF.com, there are currently 169 leveraged ETFs with an average expense ratio of 1.02% and total assets under management of $73.32 billion.

So far, ETFs are only allowed to employ a maximum leverage of 3x. It remains to be seen if more ETNs seeking leverage on par with XXXX will follow in the market.

-Jose Adinolfi

This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.


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05-12-23 1246ET

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