There's an incredibly risky new way to bet on stocks

A pair of new exchange-traded funds just hit the market that will allow investors to make money faster than ever before. But they can lose it just as quickly too.

The Securities and Exchange Commission approved the two new ETFs on Tuesday.

The ForceShares Daily 4X US Market Futures Long Fund (ticker: UP) is designed to deliver four times the return of the S&P 500, while the ForceShares Daily 4X US Market Futures Short Fund (DOWN) will return four times the inverse of the benchmark’s performance.

It’s a step into uncharted territory for the rapidly growing ETF market, which saw combined US assets surge to $US2.8 trillion in March, 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 funds — ones laid out by the fund provider itself in an SEC filing.

Here are the risk factors disclosed by ForceShares that Arnuk and Saluzzi found most troublesome (emphasis theirs):

  • 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 favour 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

While there are very real concerns around the newly-launched 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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