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Leverage Shares Launches 5X Nasdaq 100 Product

This note, while tempting for some, likely gets completely wiped out in one good bear market.

If you thought the 2 and 3 times leveraged ETFs offered by U.S. providers were an edge-of-your-seat investing ride, Leverage Shares has this to say...


Leverage Shares, which could be considered the European version of Direxion, which offers dozens of leveraged and inverse exchange-traded products (among others, of course), brought an unprecedented product to the market this week - the Leverage Shares 5x Long US Tech 100 ETP. As the name suggests, it's designed to offer 5 times the daily return on the Nasdaq 100 index. This product, which is an exchange-traded note and not an exchange-traded fund, will be linked to the Invesco QQQ Trust (QQQ).

source: Leverage Shares

source: Leverage Shares

It's important to clarify that this product is listed in Europe, not in the United States, so it won't be available to most people reading this right now.

The history of leveraged products is checkered to say the least. There is no shortage of 2 and 3 times leveraged products and inverse products available to investors. Most deal with specific commodities and sectors, but it's easy to find options on the S&P 500, Nasdaq, Dow or pretty much any major index. There is currently more than $70 billion invested in leveraged funds in the United States.

Leveraged ETFs, which tend to do best when volatility is low and gains are steady, have done very well in 2021. The ProShares UltraPro QQQ Fund (TQQQ), the largest leveraged fund, is up nearly 70% year-to-date, compared to a gain of 24% for the Nasdaq 100. TQQQ is the 3x leveraged version of QQQ.

But when markets go south, things get REALLY bad for leveraged products.

In February 2018, for example, a sudden and unexpected rise in market volatility resulted in short VIX ETFs to lose more than 90% of their value in a matter of days (some of which were forced to liquidate altogether due to losses incurred). Or take a look at what happened to oil ETFs during the COVID recession. The ProShares Ultra Bloomberg Crude Oil ETF (UCO), which doubles the exposure to crude oil prices, lost 98% of its value from January 2020 to April 2020 and needed to complete a 1:25 reverse split in order to merely stay alive. Even when volatility rises modestly, these leveraged funds can easily fall by 10-20% or more.

The closest the U.S. has gotten to something like this is the ForceShares Daily 4X US Market Futures Long Fund (UP) and the ForceShares Daily 4X US Market Futures Short Fund (DOWN). They were originally approved by the SEC in May 2017, but had their approval withdrawn following investor concerns that the products were too risky (the dozens of 3x leveraged products already in existence were apparently OK though). Nothing beyond 3x leverage has been attempted since.

The 5x leveraged note represents a new extreme in market risk. One good bear market and I imagine this note effectively loses everything and investors get completely wiped out. This will no doubt be tempting for European investors who have access to it, but I'd recommend staying far away.

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