An exchange-traded product that allows investors to place massively leveraged bets on the S&P 500 was launched Tuesday, according to a press release from sponsor Bank of Montreal.
It’s called MAX S&P 500 4X Leveraged Exchange Traded Note XXXX,
and it offers investors daily returns four times those of the S&P 500 Total Return Index. The fund’s sponsor, Max ETNs, already offers four other leveraged ETNs that provide triple exposure to the aviation and automotive industries.
The ETN began trading on the NYSE Arca on Tuesday under the ticker symbol “XXXX.”
Sponsors of the product described it as an “innovative tool” for investors.
“With the launch of these 4X leveraged ETNs, we continue to promote a diversified and dynamic investment landscape,” Adam Stempel, managing director of BMO Capital Markets, said in a press release. “As investors look for strategies to deal with changing market conditions, we provide access to innovative tools tailored to their diverse needs.”
Others were quick to express surprise that a product like this would be approved after two 4X leveraged products proposed by ForceShares were ultimately blocked by the Securities and Exchange Commission 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.
Note this: XXXX is not an ETF but an ETN, which technically makes it more similar to a debt security than a stock. Todd Sohn, ETF analyst at Strategas Securities, told ETF.com that this could have allowed XXXX to circumvent SEC rules on leveraged ETFs. Representatives for the SEC and BMO did not immediately respond to requests for comment from MarketWatch.
In the ETN prospectus, BMO emphasized that the product was designed for short-term trading by experienced investors.
“The Notes are riskier than securities with medium or long-term investment objectives and are not suitable for investors who intend to hold them for a period other than one day or who are pursuing a buy-and-hold strategy,” the prospectus said.
“Investors should actively and continuously monitor their investments in the Notes, including throughout the day. It is possible that you may incur significant losses on the Notes even if the long-term performance of the Index is positive,” the prospectus states. “Extreme caution should be exercised when considering investing in the Notes.”
Back in 2017, Joe Saluzzi, partner at institutional broker Themis Trading, spoke to Barron’s about the prospect of 4x leveraged ETFs.
“At some point the SEC has to come 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 rings true.
“If you want to go to 3x, 4x, why not go to 10x? Why not go to 100x? What are we doing here? Do we invest or gamble? Is this a stock exchange or a casino?” Saluzzi said.
After decades on Wall Street, Saluzzi is wary of products that seem to undermine the stock market’s intended purpose as a means of raising capital for companies, instead making it look like a casino designed to separate unsophisticated investors from their hard-earned money.
He wasn’t the only one to express dismay at the launch. Nate Geraci, president of the ETF Store, said in a post
Longtime Wall Street short seller Jim Chanos, who recently closed up shop, made a wry joke and asked on X if traders could buy the ETN on margin.
However, 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 use a maximum of three times the leverage. It remains to be seen whether other ETNs seeking leverage comparable to XXXX will follow it into the market.