Risk junkies rejoice.
The New York Stock Exchange (NYSE) wants to make it even easier for traders to reap outsized gains on investments. The catch? They can lose that money just as fast.
The NYSE’s Arca subsidiary submitted a request to the SEC on Tuesday to allow the listing of two exchange-traded funds (ETFs) designed to return four times their underlying indices.
While one fund will deliver quadruple the S&P 500’s move on a given day — for better or for worse — the other is designed to track the Russell 2000 index of small-cap companies, according to a filing.
If this foray into highly-leveraged ETFs sounds familiar, that’s because the first funds offering quadruple-sized returns were approved by the SEC less than two months ago. However, the regulatory commission ended up having second thoughts, putting the approval of the funds, managed by ForceShares, on hold pending further review.
The most recent filing marks another step into uncharted territory for the rapidly growing ETF market, which saw combined US assets surge to $US2.8 trillion in April, according to the Investment Company Institute. Before, the most highly-levered funds an investor could buy were ones intended to triple the return of an underlying asset.
Investing in even modestly levered funds is a potentially dangerous proposition for inexperienced investors looking to score quick gains without understanding the risk involved. Many portfolios are ill-equipped to handle the volatility associated with such ETFs, and the comeuppance on the wrong side of a levered trade can be swift and brutal.
The possible downside isn’t lost on the investment public. In a January blog post, Themis Trading principals Sal Arnuk and Joe Saluzzi highlighted some of the biggest risks facing the ForceShares leveraged funds — ones laid out by the provider itself in an SEC filing.
But while the SEC’s hesitance and Themis’ comments highlight the very real concerns around quadruple-levered funds, the broader industry is showing no signs of slowing. As of February 2, passive investments like ETFs and index funds accounted for 28.5% of assets under management in the US. That share will rise to more than 50% by 2024 at the latest, according to a Moody’s forecast.
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