Quadruple Leverage Enters US Market with 'XXXX': A New Era of Risk?
Quiver Quantitative — The recent launch of the MAX S&P 500 (SPY) 4X Leveraged ETNs, trading under the ticker 'XXXX', (XXXX) has brought exchange-traded notes (ETNs) back into the financial spotlight. Promising to quadruple the daily returns of the S&P 500, these ETNs represent the highest-leveraged trade currently available to U.S. investors. Issued by the Bank of Montreal (BMO) and MAX, their brand for leveraged and inverse products, these ETNs are marketed primarily to sophisticated investors who can actively manage their investments. However, with a fee of 0.95% and the high risk associated with such leveraged products, financial experts, including Dave Nadig from VettaFi, have raised concerns about the potential risks and costs to investors.
ETNs, unlike more familiar exchange-traded funds (ETFs), are unsecured debt obligations, relying on the issuer’s creditworthiness rather than underlying assets. This structure, combined with the use of derivatives to achieve amplified returns, makes them susceptible to extreme market volatility. Past incidents, such as Credit Suisse’s ETN collapse during the 'Volmageddon' episode and its oil note wipeout in 2020, exemplify the inherent risks. Despite these concerns, the Securities and Exchange Commission (SEC) has not imposed the same leverage limits on ETNs as it has on ETFs, allowing products like 'XXXX' to offer up to four times leverage.
Market Overview: -XXXX is the highest-leveraged ETN currently available to US investors, charging a fee of 0.95%. -Bank of Montreal and MAX, the issuers, emphasize it is only for sophisticated investors. -Concerns surround potential for extreme losses due to its leveraged nature and dependence on derivatives.
Key Points: -XXXX aims to
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