Introducing The 4x ETF
The amount of money pouring into ETF’s continues at a staggering pace. According to ETF.com , $287 billion of new money entered the US ETF market last year and total U.S.-listed ETF assets grew to $2.56 trillion. While ETF’s serve a very useful purpose by allowing investors to diversify at a low cost, it’s important to remember that not all ETF’s are the same. Some of the larger ETF’s like SPY and QQQ are backed by the actual securities in the index but there are a number of other leveraged ETF’s which contain derivatives in their holdings which could cause tracking and risk issues.
While most investors are familiar with these 2x and 3x leveraged products, a new ETF has just been proposed which would up this leverage to 4x. The product is known as the ForceShares Daily 4X US Market Futures Long Fund and ForceShares Daily 4X US Market Futures Short Fund (the proposed symbols are “UP” and “DOWN”). NYSE Arca proposed to list these but the SEC announced on December 14th that they need a longer amount of time to decide if they will approve or disapprove the listing. We’re glad that the SEC delayed a decision because these products look like they could be extremely dangerous for investors. We reviewed the ForceShares Trust Form S-1 and found the below risk factors to be very concerning :
– 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.
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?
We think that the SEC should also use this opportunity to create new guidelines for leveraged ETF products. In particular, investors should at a minimum have to sign an agreement similar to the Options Disclosure agreement which states that they fully understand the risks associated with leveraged ETF products.