'Is this a stock market, or a casino?' New 4X leverage S&P 500 ETN met with caution

By Joseph Adinolfi

An exchange-traded product that allows investors to place massively leveraged bets on the S&P 500 launched on Tuesday, according to a news release from the sponsor, Bank of Montreal.

It is called the MAX S&P 500 4X Leveraged Exchange Traded Note XXXX, and it will offer investors daily returns four times that of the S&P 500 Total Return Index. The fund's sponsor, Max ETNs, already offers four other leveraged ETNs offering 3X exposure to the airline and auto industries.

The ETN started trading Tuesday on NYSE Arca using the ticker "XXXX."

Sponsors of the product heralded it as an "innovative tool" for investors.

"With the launch of these 4X leveraged ETNs, we continue to foster a diversified and dynamic investment landscape," said Adam Stempel, managing director of BMO Capital Markets, in a news release. "As investors seek strategies to navigate evolving market conditions, we provide access to innovative tools designed to meet their various needs."

Others were quick to express surprise that a product like this would be allowed after two 4X leveraged products proposed by ForceShares were ultimately blocked by the Securities and Exchange Commission back in 2017.

Although the SEC initially approved a rule change that would allow 4X leveraged ETFs, the agency eventually decided to reconsider, according to a report from Barron's.

One thing to keep in mind: XXXX isn't an ETF, it is an ETN, which technically makes it more similar to a debt instrument than a stock. Todd Sohn, ETF analyst at Strategas Securities, told ETF.com that this could have allowed XXXX to circumvent the SEC's rules regarding leveraged ETFs. Representatives for the SEC and BMO didn't immediately respond to requests for comment from MarketWatch.

In the ETN's prospectus, BMO emphasized that the product is designed for short-term trading by sophisticated investors.

"The notes are riskier than securities that have intermediate- or long-term investment objectives, and aren't be suitable for investors who plan to hold them for a period other than one day or who have a 'buy and hold' strategy," the prospectus said.

"Investors should actively and continuously monitor their investments in the notes, even intraday. It is possible that you will suffer significant losses in the notes even if the long-term performance of the Index is positive," the prospectus said. "You should proceed with extreme caution in considering an investment in the notes."

Back in 2017, Joe Saluzzi, a partner at institutional broker Themis Trading, spoke to Barron's about the prospect of 4x leveraged ETFs.

"At some point, the SEC has to come in and say, 'Enough is enough.' This is a stock market, not a casino," he said at the time.

During a phone interview with MarketWatch on Tuesday, Saluzzi said his comment from six years ago still applied.

"If you're going to go to 3x, 4x, why not go to 10x? Why not go to 100x? What are we doing here? Are we investing, or are we gambling? Is this a stock market, or a casino?" Saluzzi said.

After decades on Wall Street, Saluzzi is wary of products that appear to subvert the intended purpose of the stock market as a vehicle for companies to raise capital and instead make it look like a casino designed to separate unsophisticated investors from their hard-earned money.

He wasn't alone in expressing some dismay at the launch. Nate Geraci, president of the ETF Store said in a post on X, that it was "[w]ild that grandma will be able to buy a 4x leveraged S&P 500 ETN before a spot bitcoin ETF..."

Longtime Wall Street short seller Jim Chanos, who recently closed up shop, offered up a tongue-in-cheek joke, asking on X if traders would be able to buy the ETN on margin.

To be sure, leveraged products like these are becoming increasingly popular. According to ETF.com, there are presently 169 leveraged ETFs with an average expense ratio of 1.02% and total assets under management of $73.32 billion.

So far, ETFs are only allowed to employ a maximum of 3x leverage. It remains to be seen if more ETNs aiming for leverage on par with XXXX will follow it to market.

-Joseph Adinolfi

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12-05-23 1246ET

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