By Joseph Adinolfi
Levered exchange-traded products are growing increasingly popular, analysts say, but are traders fully aware of their risks?
Investors can now make turbocharged bets on or against the Magnificent Seven group of stocks due to the launch of an exchange-traded product offering five times leverage on the hot megacap technology sector. Of course, that doesn't mean they should.
Longtime ETF analyst Todd Sohn of Strategas Securities said the Leverage Shares 5x Long Magnificent Seven ETP UK:MAG7 appears to be the most heavily levered product available to trade in any developed market, although a seven-times levered index on oil and gas futures exists in Europe.
While Sohn said he likes to believe that investors in products like this understand the risks, he acknowledged that there will always be a crowd that jumps in without fully understanding how they work, leaving the traders vulnerable to large losses.
The Leverage Shares Magnificent Seven product is one of eight levered exchange-traded products from the company that started trading on Tuesday. Others include the Leverage Shares -3x Short Magnificent Seven ETP MAGS, Leverage Shares 4x Long Semiconductors ETP UK:SOXL and Leverage Shares -4x Short Semiconductors ETP UK:SOXS.
The company also introduced products offering leveraged exposure to popular single stocks like Super Micro Computers Inc. (SMCI) and IonQ Inc. (IONQ).
There is a catch, however: As of now, these products are only trading on the London Stock Exchange, meaning anybody in the U.S. who wants to trade the U.S. dollar-denominated versions will need to use a broker that offers access to European markets.
Most U.S.-based discount brokerages like Robinhood (HOOD) and Charles Schwab (SCHW) do not, at least not for ETPs, according to a statement from a Schwab representative and information gleaned from Robinhood's website. Although U.S. clients of Interactive Brokers Group Inc. (IBKR) can trade LSEG-listed products, according to a company spokesperson.
While levered ETPs, ETNs and ETFs are growing increasingly popular with retail traders, some market gurus expressed concerns about the amount of leverage employed by five times and four times levered products. During an email exchange with MarketWatch, Sohn described the European ETP market as the "wild west."
"You won't find that kind of leverage outside of a 4x leverage S&P ETN here in the U.S. (for now at least)," Sohn added in comments emailed to MarketWatch. He is referring here to the MAX S&P 500 4X Leveraged Exchange Traded Note XXXX, which debuted back in December.
"Retail / traders love these types of products though, they're a great way to express a high conviction bet - they just need to know what they are getting involved with. That is, they aren't buy and hold funds, they are precision instruments," Sohn said.
Joe Saluzzi, co-head of equity trading at Themis Trading, said many investors might not understand this distinction.
"I think products like this are very dangerous," Saluzzi said during an interview with MarketWatch. "The key problem is they're not investments, they're trading instruments. Some people probably know that, and some people don't."
In the prospectus for the 5x Mag Seven ETP, Leverage Shares outlined some of the risks associated with the product, including the possibility that it could be abruptly recalled if its losses exceed a mandatory redemption threshold, potentially saddling investors with substantial losses.
See: Bullish on Nvidia? This single-stock ETF could offer 1.5 times leverage on the popular chip stock - but be careful what you wish for.
This is because the ETP uses investors' money as collateral for margin loans to achieve their leverage targets, leaving them potentially vulnerable to margin calls.
The launch comes amid rising demand for leveraged products among retail traders. According to data from Vanda Research, the retail crowd in the U.S. has pared back its purchases of vanilla index-tracking ETFs like the SPDR S&P 500 Trust ETF SPY in favor of triple-leveraged products like the Direxion Daily Semiconductor Bull 3X Shares SOXL in recent weeks.
See: Individual investors are buying fewer stocks, but using more leverage
Demand for these types of products has also been high in Europe. A Leverage Shares 3X Tesla ETP UK:3TSL, which offers traders 3x leverage on shares of Tesla Inc., has been the most-traded ETP listed on the London Stock Exchange by volume since its launch in early 2021, according to data from Leverage Shares.
Similar products offering leveraged exposure to market-leading technology stocks have recently debuted in the U.S., including products focused on the Magnificent Seven.
Roundhill Investments in February launched the Roundhill Daily 2X Long Magnificent Seven ETF MAGX, which offers two-times leverage on the Magnificent Seven, along with a Roundhill Daily Inverse Magnificent Seven ETF MAGQ, which allows traders to bet against the basket of stocks.
The Magnificent Seven includes Nvidia Corp. (NVDA), Apple Inc. (AAPL), Tesla Inc. (TSLA), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Alphabet Inc. (GOOGL) These stocks scored significant gains in 2023 and accounted for the bulk of the S&P 500's more than 24% advance. But their fortunes have diverged in the new year.
On social media platforms like X, formerly known as Twitter, the launch of the 5x leveraged Magnificent Seven ETP was greeted by chatter about it being a sign of the top.
To be fair, similar speculation greeted the launch of the MAX four-times leveraged S&P 500 ETN. That product is up more than 30% since the start of the year, compared with a 9.5% advance for the S&P 500 SPX through Thursday, according to FactSet data. To be sure, like the Leverage Shares products, the S&P 500 ETF isn't intended to be held long term, according to its prospectus.
See: 'Is this a stock market, or a casino?' New 4X leverage S&P 500 ETN met with caution
Oktay Kavrak, director of communications and strategy at Leverage Shares, said in comments emailed to MarketWatch that the company's leveraged products aren't intended to be part of a buy-and-hold portfolio.
He compared them to popular zero-day to expiration, or 0DTE, options, risky contracts with less than a day until they expire. These contracts are increasingly being used by retail traders to make risky speculative bets on short-term market swings.
"Leveraged ETPs are just another instrument in a trader's toolset. In the context of growing margin debt levels and burgeoning interest in 0DTE options, our products offer an additional avenue to express market convictions, whether bullish or bearish, in a risk-mitigated framework," he said.
-Joseph Adinolfi
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03-28-24 0729ET
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