Brocker.Org: Four Times the Fun (And Losses!) with New Leveraged ETFs

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Issuers of exchange traded funds (ETFs) continue pushing the envelope with new, exotic instruments to catch the eyes of traders. That includes the possibility of some new leveraged ETFs coming to market that are more leveraged than traders are used to.

Earlier this week, the Securities and Exchange Commission (SEC) approved the ForceShares Daily 4X US Market Futures Long Fund and the ForceShares Daily 4X US Market Futures Short Fund. Currently, ProShares and Direxion, the two largest issuers of leveraged or “geared ETFs,” only offer double- and triple-leveraged ETFs.

Buying UP and DOWN

The ForceShares Daily 4X US Market Futures Long Fund will trade under the ticker “UP” while the ForceShares Daily 4X US Market Futures Short Fund will trade with the ticker “DOWN.”

“The primary investment objective of the Long Fund is to seek daily investment results, before fees and expenses, that correspond to approximately four times (400%) the daily performance of the closing settlement prices for lead month Standard & Poor’s 500 Stock Price Index futures contracts,” according to the SEC filing.

DOWN, an inverse ETF will take a similar approach from the bearish side.

“The primary investment objective of the Short Fund is to seek daily investment results, before fees and expenses, that correspond to approximately four times the inverse (-400%) of the daily performance of the Benchmark,” according to the SEC filing.

A Futures Strategy

Both quadruple-leveraged ETFs will use S&P 500 Index futures and e-mini futures to gain leverage. The idea of a quadruple-leveraged ETF sounds enticing, but risks abound, particularly for traders that dare hold these products for longer than a day or two.

“Since gross exposure must always equal 300% of net assets ($103 million in net assets x 300% = $309 million) at the beginning of each trading day, $6 million of exposure must be added to the portfolio,” said Direxion.

That statement pertains to triple-leveraged ETFs, so imagine the daily reconfiguring and derivatives buying ForceShares will be doing to attain quadruple leverage. ForceShares acknowledges the risks associated with amplified leverage in its SEC filing.

“The Long Fund may have difficulty achieving its daily leveraged primary investment objective due to fees and expenses, high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Long Fund. Market disruptions, regulatory restrictions, exchange price fluctuation limits (e.g., circuit breakers), or extreme volatility will also adversely affect the Long Fund’s ability to adjust exposure to the required levels,” according to the filing.

A similar warning was given for the short fund.

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