There’s an incredibly risky new way to bet on stocks (UP, DOWN)


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A
trainer picks up Chinese Yuan banknotes from the open mouth of a
crocodile during a performance at a zoo in Wenling, Zhejiang
province March 2, 2015.

Reuters /
China Stringer Network


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
$2.8 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 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

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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