If you look around the table and don’t see a sucker…
For those that have become tired of trading the Satoshi special (aka ‘bitties’, ‘digies’, ‘Nakas’ or just BitCoin) and need something to do until the ‘Lehman Brothers Coin’ is unleashed upon the world a week from Monday – enter: the Bank of Montreal’s FANG+. It’s an exchanged traded product that is sure to put hair on your chest.
The BMO Rex Microsectors FANG+ Index 3x Levered ETN debuted this week; as did the FANG+ Inverse Leveraged ETN – the latter to the former as Mr. Hyde is to Dr. Jekyll.
For a poultry 95 basis point expense ratio (which is only 10 times more than trading the SPRD), the FANG+ Index gives you equal measure of nine successful tech companies, and Twitter. Specifically: Facebook, Apple, Amazon, Netflix, Alphabet (nee Google) Alibaba, Baidu, Nvidia and Tesla.
Those on the money would note that the FANG+ is cut from a different cloth when compared to its more commonly understood ETF brethren. An ETN – as in the case of the FANG+ – is an exchange traded note. So where an ETF owns a basket of stocks, bonds or commodities that it tracks, and ETN does not – it is simply debt issued by banks that promise a return to the investor linked to the performance they track. The disclaimer filed with the SEC illuminates: “The notes are riskier than securities…may not be suitable for investors who plan to hold them for a period other than one day…Investors should actively and continuously monitor their investments in the notes, even intra-day”.
So why is the FANG+ only for the strongest of constitutions? Two reasons above all else: firstly it’s a bet on the holders knowledge or view of the actual volatility of the underlying securities, not just the implied volatility – and its effect is multiplied by a factor of three. For instance, a $1000 investment that gained 5% on day one, lost 5% on day two, gained 5% on day three, etc., etc., and continued in this way would be nearly 11% down on day ten. The unlevered version would only have lost 1.2%.
The second reason why it’s so risky: with your more conventional margin account, leverage ratios fall as the value of portfolio assets rise. But not with the FANG. This beauty keeps its leverage constant by boosting its indebtedness – drawing on its swap arrangements – as the value of its assets appreciates.
Unlikely to be popular among investors who are long in the tooth.
