An Aggressively Clueless Investment


While the fiduciary law languishes on death row, investors are now allowed to trade 4X leveraged ETFs.  Such is the state of the world we live in.

For the uninitiated, these funds allow investors to participate in 4X the daily movement on both the upside or downside of the daily fluctuations of the fund’s holdings.

The ForceShares Daily 4X US Market Futures Long Fund, ticker symbol UP (you really cannot make this stuff up) and 4X US Market Futures Short Fund (you guessed it; ticker symbol DOWN) will deliver 400% of the daily performance of S&P 500 Stock Index Futures.

In addition, these funds will fall under the Securities Act of 1933 rather than the Investment Company Act of 1940. This important distinction allows these products to invest more than 20% of their assets in vehicles like stock index futures. If they followed the 1940 Act, this would be prohibited.

The story gets even more bizarre. These funds are somehow allowed to be classified under the JOBS Act passed under President Obama. This law allows some companies to be exempt from certain reporting requirements under Sarbanes-Oxley Act and other regulatory legislation.

This legislation was designed to create jobs by allowing “emerging growth companies” to accelerate the startup process and begin hiring people to aid economic growth.

Ben Johnson of Morningstar sums up the SEC approval, including 4X leveraged ETFs under this category, “I don’t know what the prior administration had in mind with the JOBS Act, but I don’t think it was quadruple-leveraged ETFs.”

This classification makes Ronald Reagan’s 1980’s categorization of sugar-filled ketchup in school lunches as a vegetable substitute, look sane.

The average investor should NEVER use any of these radioactive products. Simple math will explain why.

Imagine buying a stock for $10. If it loses 50% of its value in one day you will be left with $5. Let’s say the next day the stock goes up 50%. You will not break even. Sorry, 50% of 5 is $2.50; so that 50% rise will leave you with $7.50, a 25% overall loss.

These numbers explode with leverage. As Michael Batnick said, “$1 can alternate between 1% gains and 1% losses for a really long time before you lose any money. But alternate between +10% and -10% and after 918 times, you’re left with less than a penny.”

“ETFs that employ leverage are so seductive because they offer the potential for huge gains. For example, JNUG, the 3X Junior Gold Miners Index Bull, has closed up 10% in a day in 15% of all trading days.  And even though the average daily change in JNUG is just 0.05%, after 905 trading days, it’s down 98%.”

Leverage guns the gas pedal of this death spiral.

If you thought this story cannot get worse, you’re wrong.

According to ETF Daily News, it turns out the Sponsor of this nitroglycerin:

  • Has no experience operating commodity pools;
  • Has a very small support staff and relies on a few key individuals;
  • Has limited capital and may be unable to manage the funds if it sustains continued losses;
  • May have conflicts of interest which may cause them to favor their own interests to your detriment; and
  • Has not registered the funds under the Investment Act of 1940 which cancels out many investor protections.

Only on Wall Street do we see products created like this. Our CEO Josh Brown stated this insanity when he commented on Wall Street’s typical view on people getting fired, “Layoffs are great news, the more the better.” We can make quadruple leveraged ETFs number 11 on his Ten Insane Things We Believe on Wall Street list.

How does Wall Street believe you can become a millionaire by using quadruple leveraged ETFs? Start out with $4 million.

Normal businesses don’t do this type of stuff.

  • Imagine if there was medicine that would make you feel 4X better but could give you a 4X greater chance of having a massive heart attack?
  • How about a restaurant that might give you the opportunity to have 4X better-tasting food, but also 4X the chance of projectile-vomiting food poisoning?
  • What if a car could be 4X as safe as the average automobile, but could also have 4X the chance of having its engine explode?

No sane person would purchase any of these products.  The same can be said for these leveraged ETFs.

In other news a new “thematic” ETF just came out called BLES. This includes “a proprietary selection methodology based on biblical values.” Maybe they can leverage this one. This would give investors a coin flip of a chance for eternal damnation or blessed paradise.

Where do I sign up?

I think I have one symbol that sums up all these crazy funds:  BLSHT.

If all of this is bugging you out. I will leave you with this quote from Joe Rogan to put things into perspective.

“If you ever start taking things too seriously, just remember that we are talking monkeys on an organic spaceship flying through the universe.”

Well said.

Source:  InvestmentNews, SEC OKs Leveraged ETFs by John Waggoner