Hitchhiker: You heard of this thing, the 8-Minute Abs?
Ted: Yeah, sure, 8-Minute Abs. Yeah, the excercise video.
Hitchhiker: Yeah, this is going to blow that right out of the water. Listen to this: 7... Minute... Abs.
Just like the infamous 7 Minute Abs scene from Something about Mary, many had wondered for years why there is no ETF that allows retail investors to lose money even faster than with the existing inventory of various triple-leveraged passive investing offering.
Well, as of last night there is.
On Tuesday, the SEC ignored numerous complaints, and approved a request to trade quadruple-leveraged exchange-traded funds, the first product of its kind, and one which will spawn hundreds of copycat imitators promising even greater possible returns and instead delivering theta that is guaranteed to wipe out virtually anyone who allocates capital to the product.
The request to list ForceShares Daily 4X US Market Futures Long Fund, under the ticker UP, and ForceShares Daily 4X US Market Futures Short Fund, under the far more appropriate ticker DOWN, was filed by the NYSE Arca exchange. One of the funds is designed to deliver 400 percent of the daily performance of S&P 500 stock index futures, while another fund will aim to deliver four times the inverse of that benchmark. That means that - in theory - a fund could go up 8 percent on a day the index it tracks falls by 2 percent. However, due to the rebalancing nature of such products, it most likely won't, and instead will be used as another massively shorted vehicle by all those pension funds who scramble to capture the volatility roll "dividend" from markets that no longer see any risk, anywhere.
"We're excited about it," said Sam Masucci, chief executive officer at Exchange Traded Managers Group LLC, which is distributing the product, though he said the product is "not going to be for everybody. "But for those people that are looking for the leveraged exposure to the S&P and they're not looking to do it by way of a futures product here you have a publicly listed security," Masucci said.
Ironically, the approval comes at what Reuters dubbed a "difficult time" for sponsors of more exotic ETFs. Even more ironically, last year, the SEC presented draft rules that would restrict the use of derivatives, which impacted the ability of some fund managers' ability to keep highly leveraged products on the market. Just last month, the SEC also ruled against an application by the Winklevoss brothers to bring the first Bitcoin ETF to market, although last week the SEC said it would review that decision. It apparently has no problem with 4x levered ETFs, however.
And while we await the first quintuple (and more) leveraged ETF, below - in case anyone really needs it - is a series of red flags and risk factors surrounding the ETF as flagged previously by our friends over at Themis Trading, and taken straight out of the ForceShares Trust Form S-1:
- the Sponsor has no experience operating commodity pools
- the Sponsor is “leanly staffed” and “relies heavily on key personnel to manage trading activities”
- the success of a Fund depends on the ability of the Sponsor to accurately implement its trading strategies, and any failure to do so could subject the Fund to losses.
- the Sponsor may have conflicts of interest, which may cause them to favor their own interests to your detriment…the Sponsor’s principals, officers or employees may trade futures and related contracts for their own accounts.
- the Sponsor has limited capital and may be unable to continue to manage the funds if it sustains continued losses
- the failure or insolvency of the Custodian for a Fund could result in a substantial loss of the Fund’s assets.
- the Funds are not registered investment companies, so you do not have the protections of the 1940 Act.
As Themis concluded in January, "There are plenty of questions regarding the specifics of this product but the real question is: does the market really need a 4x leveraged product? If the SEC approves this product, then what is to stop a company from trying to list a 5x, 10x or even 100x leveraged product? "
It now seems that the answer to the first question is "yes", and as for 100x leveraged products, aka ETF "weapons of mass destruction"100 it's just a matter of time before one comes along as desperate trader demand increasingly more insane ways of creating much needed volatility in a centrally-planned market which no longer sees any risks