"Let me help an individual investor grow their portfolio" - said no investment banker ever. Most leveraged ETF (ETN) are designed by investment banks, this one was designed by UBS. They are designed for the benefit of one party - the designer of the ETF - the investment bank. The design has one goal - to transfer your investment to them, slowly over time.

A vanilla bond or stock ETF is an extremely useful (and beautiful) financial instrument that has democratized investing similar to its older cousin the mutual fund. Almost every ETF other than a vanilla bond/stock ETF is unadulterated toxic waste that has oozed out from the sewers of finance and will wipe out your capital.

A simple yardstick to demarcate toxic waste for the good ole fashioned bond/stock ETFs - if you cannot redeem/create it then don't touch it. Leveraged ETFs (and commodity ETFs) cannot be redeemed/created.

Guide to ETF redemption/creation - https://www.etf.com/etf-education-center/etf-basics/what-is-...

> "Let me help an individual investor grow their portfolio" - said no investment banker ever

Nobody can honestly say this. Trading is about risk transfer. And risks sometimes come home to roost, which means portfolios can always lose money.

That said, broadly, yes. If something seems too complicated, don't buy it.

> Almost every ETF other than a vanilla bond/stock ETF is unadulterated toxic waste that has oozed out from the sewers of finance and will wipe out your capital

This is true, but not (just) because banks are venal. These products are designed for professional traders. There is hedging value, to certain corporates, for having a short-dated commodities future exchange traded product (ETP) leveraged at a benchmark rate. Particularly if that rate floats with the corporate's cost of capital.

> good ole fashioned bond/stock ETFs - if you cannot redeem/create it then don't touch it

Individual investors can never redeem or create ETF units. That's restricted to authorized participants (APs).

APs can create and destroy units of most leveraged ETFs. They can't do that for exchange-traded notes (ETNs), which is where most of the structured stuff lives.

Atleast we agree on the venality of investment banks ;)

Professional traders don't trade leveraged ETFs (ETNs) because they know the friction and carry built into them. A professional trader who wants to make a leveraged bet on S&P will just use e-mini futures.

You missed the point about create/redeem. When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY. For redeem, I can submit SPY and get back the equivalent basket and cash component.

ProShares Ultra QQQ (3x NASDAQ) had $5.4B in the trust as per Yahoo finance. The holdings [1] had $13.7B in swaps, $0.5B in treasuries and $2B in stock. How exactly would I create/redeem this basket in kind?

[1] https://www.proshares.com/funds/tqqq_daily_holdings.html

> When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY

No, you can't. An authorized participant can.

All ETFs, by definition, involve creation and redemption mechanisms. It's what separates them from other ETPs.

> How exactly would I create/redeem this basket in kind?

You can't.

According to the prospectus [1], "in exchange for the deposit or delivery of a basket of assets (securities and/or cash)". Going into deeper mechanics [2], creation and redemption involve the AP entering into offsetting swaps with the ETP.

[1] https://www.proshares.com/media/prospectus/statutory_prospec...

[2] https://www.proshares.com/media/prospectus/statement_of_addi...

>> How exactly would I create/redeem this basket in kind?

>You can't.

Thank You.

As to your earlier point about AP, the bar is pretty low in SPY because I used to work at desk that was one ;)

Many leveraged ETFs can be redeemed or created, though. ETFs and ETNs are two very different products. ProShares, the issuer behind the popular 3x leveraged NASDAQ 100 and S&P 500 ETFs TQQQ and UPRO, even publishes a fee schedule for redeeming and creating their products [1]. Also, unlike with ETNs, if the issuer of am ETF goes under, you receive the underlying assets. In other words, there's no counterparty risk.

I agree that leveraged ETFs can be dangerous if used incorrectly (look up volatility decay), but they aren't "trash" and they certainly aren't anywhere near as dangerous as even unleveraged ETNs. Here's a resource about the difference between those two, by the way [2]. In short, ETF shares represent a direct stake in the underlying assets, similar to owning equity in a house or business. ETN shares are more like little IOUs along the lines of bonds and loans. They have their place, but they're difficult to use safely, especially when leverage is involved.

[1] https://www.proshares.com/resources/creation_and_redemption_...

[2] https://www.investopedia.com/financial-edge/0213/etf-or-etn-...

They can be redeemed or created but that is a facility for market makers. The redemption is not in kind since you can't redeem swaps. I posted an example in the thread above.

I learned this the hard way during the 2008(ish) crisis when oil dropped from $150/barrel to ~$30/barrel and I sold other assets at a loss to buy USO (an ETF that was ostensibly supposed to track the price of oil). Instead, when oil went up to $80/barrel in a few months, USO increased by ~3% while the other stuff I'd sold at a loss had rebounded (though to a lessor extent than the price of a barrel of oil).

SOMEbody made a multigenerational fortune off of that price discrepancy. The SEC was briefly investigating that episode, but the investigation went away after a while.

As a little guy, you can make a brilliant play by correctly predicting the future and still get totally screwed.

Sorry to hear that atleast you learnt the lesson early. The big flaw is understanding the myth of the "price of oil". There is no such thing. There are grades and dates and delivery locations and the price of storage. You are trading to one point in this multi-dimensional space. In normal times it appears in just one dimension - time - but it times of stress, it explodes.

That futures rollover is a real killer, the winners were sellers of the contracts knowing the ETF would be forced to rollover.

Why did you use USO instead of trading oil futures contracts?

Same here with USO. I didn't fully understand it at the time, so I used USO because you can buy and sell like a stock. I thought that it would just be a proxy for investing in oil futures contracts, similar to how buying SPY is basically a proxy for buying a weighted basket of stocks in the S&P. I learned that I was wrong the hard way (luckily didn't wager anything I couldn't afford to lose).

An ETF is by definition something that can be created or redeemed. If it can't be created or redeemed, then it's an ETN, which is completely different.

Leveraged ETFs are usually composed of debt plus equity, and they can certainly be created and redeemed.

You personally cannot create or redeem any ETF, because the quantities involved are huge and you need to be what's called an "authorized participant".

Any hedge fund or market participant of decent size (by volume) can access the create/redeem market through their trading desk or prime broker. Create/redeem is a pain for the clearing broker as they have move cash/securities around but if you give them enough business they will do it for you.

When I was a teenager, I joined a poker game with some of the local sharps. They cleaned me out. I knew enough about poker to know they were cheating, but not enough to know how they did it.

I decided after that to stay away from investing in games I didn't understand well.

> “We’re too old to play those games,” Mr. Zhu said. “It’s too difficult for us. We were just looking for basic income.”

While I feel bad for the outcome these people have found themselves in, who looks at any sort of derivative as a source of "basic income"? There are very well established investment vehicles for generating safe returns, so why would someone expect that something returning some huge multiple on top of that to be a safe bet? I don't think that the ideal solution to this is to restrict access to certain investments behind something like the "accredited investor" designation, but that situations like this occur and the fact that Mr. Zhu is suing his broker over it make me understand why that designation exists.

'who looks at any sort of derivative as a source of "basic income"'

Covered calls?

If you have the risk tolerance for it, I would strongly advocate for using a margin account and purchasing stock in companies you trust and understand instead of holding onto someone else's interpretation of the same idea (i.e. ETNs and other higher-order derivatives). Put another way, if you don't have the stomach for a margin account, you absolutely should not be putting any substantial amount of money into these kinds of derivatives either. It's arguably even more risky.

Sure, 5%+ APY interest sucks, but so does being completely wiped-out over something you have zero visibility into. At least with a margin account you can look into your assets and control your risk in a very direct and immediate way.

I personally run a 50/50 leverage ratio with my margin account (i.e. 2x). I review this status on a weekly basis and will make decisions based on high/low water marks (45/55%). I've previously held ETNs and other derivatives when I was still learning the ropes... Margin accounts are 10x less stressful for me by comparison. It's literally just a normal portfolio that I would otherwise be perfectly comfortable with, but tuned slightly for a longer-term investment horizon. The fees are negligible to me with dividend income and the bigger strategic picture at play.

This is honest and good advice. While, I would not recommend anyone trade on margin or even trade individual stocks, but if you are going to trade leveraged stock etfs then this is a far more honest way to go about it.

The leveraged ETFs just give you the illusion of trading leveraged while siphoning away your capital in drips.

If you do this yourself and feel comfortable, good for you.

But I wouldn't widely suggest people lever up 2x using margin. It's dangerous advice. In a severe down market you can be wiped out with a margin call and forced to sell at a low point in the market.

I strongly disagree with the notion of "dangerous" advice, especially when given in good faith. I even prefaced my post with a disclaimer regarding this practice.

I could pose a counterargument that not investing aggressively in finance from a young age is the most dangerous thing you could do to your future self if you hope to maintain an equal or superior standard of living.

Where are you getting 5%+ APY?

He’s talking about paying 5% interest to borrow leverage. That’s about the going rate.

Margin interest these days is a lot lower. 5% is about what Robinhood charges. IBKR charges 1.55-0.85% depending on the amount borrowed [1].

[1] https://www.interactivebrokers.com/en/index.php?f=44427

Thank you for bringing this to my attention.

Never sure what to think when reading these articles. Sad story but what he did is tantamount to taking your whole net worth and betting in black in roulette. Do you feel bad if the person loses?

Doing this as a side bet with some extra money is one thing but putting your entire life savings into a highly speculative investment is not smart. Save your nest egg for “boring” stuff like broad index funds.

Warren Buffett: For most people, the best thing is to do is owning the S&P 500 index fund

https://www.cnbc.com/video/2020/05/04/warren-buffett-investi...

And if you want some leverage, borrow against your stock with a credit line.

Can you explain what this means? What does borrow against your stock mean

At most brokerages, etrade for example, you can take out a loan with what you own as collateral. https://us.etrade.com/bank/line-of-credit

Got it, but I still don't understand what "And if you want some leverage, borrow against your stock with a credit line." means. How does this increase leverage?

By borrowing against your securities you have more cash to invest. You've put a multiplier on the amount you can invest. That's leverage. However, you have to pay back the loan with fees and interest. This increases risk because you could end up owing money rather than just having none if the securities crash.

Options provide more leverage than margin.

Options decay though. They can be a very good way to increase your leverage and can be awesome to increase your exposure especially if you get into more complicated strategies, but for pure long term index investing on margin for leverage is better.

The interest rates are very low right now and the risk, while still obviously higher than non leveraged investing, is much lower than with options. That's only true if you invest in the main (slower moving) indexes though, being leveraged on individual stocks can be much more risky.

Writing OTM calls on index ETFs you own can be a good way to increase your return with almost no risk though (expect the risk of limiting your upside).

Higher return, higher risk. Nothing to see here...

Except, except I'm not sure how these vehicles are allow for general investors at the same time that Reg T bars most/all investors from too much leverage.

https://en.wikipedia.org/wiki/Regulation_T

The investors themselves aren't overleveraged, but the ETFs they're purchasing are. Your link specifically refers to the amount of leverage offered to individual investors

So, for example, that regulation does not prevent me from buying an overleveraged ETF, but only from overleveraged my own account (whether it be buying these ETFs or a share of coca-cola)

Yes, but a directly levered position and an indirectly levered position, for all but Talebian wet dream scenarios, have the same exact risk profile.

Levered notes are regulatory arbitrage and are not materially safer investments levering up on one's own. In fact, the investor is probably better served by the latter due to lower fees.

The basic difference is that no one is extending credit to the purchaser. The worst that can happen is that your investment become worthless, which is bad obviously, but less bad than losing your shirt and then having to make margin.

You can't lose more than you invested, same risk as call options which are available to most investors.

only for the initial margin, not for maintenance margin

I will never trust banks since they are for-profit companies, eg. I went out of Bitcoin as soon as big banks could short it. I appreciate small banks a lot more, but they don't have that much influence.

But, I trade stocks and I recently traded etf's.

It's high risk, high reward opportunity. But as all things, do not invest money you can't lose.

Also, turbo's or multiplied etf's are dangerous for long term. Since a 3% rise is not the same as a 3% down in value ( you lose more) and a multiplier makes it worse.

I don't know everything about etf's, I only joined shortly because the opportunity seemed there and I had some risk money. I do admit going in head over heels at the time, I've never held it for too long.

None the less, would appreciate any insight any can have. It takes a long term to find actual valuable advice on etf's.

A book recommendation would be good also.

> I appreciate small banks a lot more, but they don't have that much influence.

https://en.wikipedia.org/wiki/Savings_and_loan_crisis

Small banks don't necessarily mean more stable or better banks

> I will never trust banks since they are for-profit companies

Banks don't have to be betting against you to make money. They can simply charge a markup or profit from the bid-ask spread if they're making a market.

I know. But when you are betting on btc to rise and banks can short BTC, i went out of there.

I was right, BTC had the first major decline arround that time. My guess now and then is that banks were buying BTC to make it drop when they want.

PS. I went out BTC 3 times and started all over with the initial starting amount, so saying "betting on BTC to rise" is a bit exaggerated though.

PS2. I'm talking about very big "banks" mostly, eg. JP Morgan or Goldman Sachs. When they give a public statement, i'm always inclined to think the opposite.

I've always been puzzled by accredited investor regulations. For an over-simplified explanation for most countries such as the US and Canada it means one has at least $1,000,000 of investable assets. Accredited investors can invest in things that governments prohibit non-accredited investors from touching, such as most forms of private equity. The rules are there to protect amateur investors, however governments still allow anyone to participate in shockingly risky investment vehicles.

Our regulations are not built for purpose, and I don't think it's possible for there to be an effective way for governments to tell individual investors what is "too risky" for them.

A lot of it just comes down to individuals being responsible for educating themselves or preferably hiring a financial advisor.

The cynical view is that the government just wants to tax you more if you're making bets; 15% on capital gains is nothing compared to the taxes on lotteries and gambling.

> It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny.

Plain gambling.

And no sign of having a balanced portfolio and this guy puts 800k into one leveraged stock.

I have about 25% of that in the UK and I am about 35% cash and have some very defensive stocks RIC GCT and Personal Assents that haven't lost any thing or are rebounding - just wish I had sold my RDSB in Jan/Feb but that would have oly saved my a 2-3 k loss

Who thinks they are getting a magic 18% year in risk free return?

Everybody; since the phrase "picking up pennies in front of a bulldozer" exists, you know it must be common.

18% is not pennies. That beats every low risk asset by a mile. 0.25% is pennies. And yes, all the market data fees, liquidity maker / taker fees - I get those pennies getting picked up.

The power of wishful thinking is stronger than most people realize.

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Every. Time.