Day traders beware: BMO's ‘XXXX’ exchange-traded notes put risky play in spotlight

financialpost.com:

The arrival of a U.S. investment strategy that offers amped-up stock leverage is putting a spotlight on an industry popular with retail traders, but prone to extreme volatility and frequent blow-ups.

The MAX S&P 500 4X Leveraged ETNs, which launched last week with the eye-catching XXXX ticker, promise to quadruple the daily returns of the benchmark index. That makes them the highest-leveraged trade of their kind currently available to American investors, according to CFRA Research. They charge a fee of 0.95 per cent.

The issuer Bank of Montreal and MAX — BMO’s brand for leveraged and inverse products — say that the exchange-traded notes are intended only for sophisticated investors, who can actively monitor their investments and who understand the potential consequences of buying this type of vehicle.

Still, some market-watchers urge trading caution.

“It seems extraordinarily expensive, risky, and includes a bit of counterparty risk to boot,” Dave Nadig, financial futurist at VettaFi, said of XXXX. “All so you can day-trade faster?”

Exchange-traded notes are a different beast from their fund counterparts that individual investors are more used to. Unlike exchange traded funds, they are unsecured debt obligations, meaning they are backed by the issuer rather than their underlying assets. Since they frequently use derivatives to amplify returns, they are vulnerable to extreme market events. A Credit Suisse ETN was at the heart of 2018’s ‘Volmageddon’ episode. The bank’s oil note was then wiped out two years later when crude prices went negative.

The Securities and Exchange Commission hasn’t limited the amount of leverage ETNs can offer like it did for ETFs — which are capped at two times leverage for new launches. Products