Inside The Leveraged & Inverse FAANG ETNs Launch

By Zacks Investment ResearchStock MarketsJan 24, 2018 10:03PM ET

www.investing.com/analysis/inside-the-leveraged--inverse-faang-etns-launch-200283603

Inside The Leveraged & Inverse FAANG ETNs Launch

By Zacks Investment Research | Jan 24, 2018 10:03PM ET

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Buoyed by an astounding surge in FAANG stocks (Facebook (NASDAQ:FB) , Apple (NASDAQ:AAPL) , Amazon.com (NASDAQ:AMZN) , Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) ), the Bank of Montreal (BMO) in coordination with REX Shares, rolled out a pair of ETNs. These will allow investors to bet on or against the technology leaders with a high risk level.

The new products, namely BMO REX MicroSectors FANG+ Index 3X Leveraged ETNs (AS:FNG) and BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETNs (AS:FNG) , offer three times (3x) leveraged and inverse exposure, respectively. Both track the NYSE FANG Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next generation technology and tech-enabled companies in the technology and consumer discretionary sectors (read: How to Invest in the Hottest Technologies With ETFs).

The index currently has 10 constituents including the so-called FAANG stocks, Alibaba (NYSE:BABA) , Baidu (NASDAQ:BIDU) , Nvidia (NASDAQ:NVDA) , Tesla (NASDAQ:TSLA) and Twitter (NYSE:TWTR) . If the index gains 10%, FNGU should trade up 30% while FNGD should fall 30%. Both products come with an expense ratio of 0.95%.

How does they fit in today’s portfolio?

This ETF could be an intriguing choice for investors seeking concentrated exposure to the fastest-growing segment of the broad stock market. Notably, FAANG is the hottest cluster, having returned 46.5% last year. The extensive adoption of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, artificial intelligence (AI) and cryptocurrency is acting as the key catalyst, and will provide an edge to these ETNs.

Additionally, a combination of factors like improving global fundamentals, strong corporate earnings, a rising interest rate scenario, and Trump’s biggest tax overhaul in decades is fueling further growth in this area.

Despite being risky investments, soaring stock prices could result in huge demand for leveraged products as investors seek to register big gains in a short span. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend. However, these could lead to huge losses compared to traditional funds in fluctuating or seesawing markets. This is because their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) (read: 8 Leveraged ETFs That Soared At Least 20% to Start 2018).

ETF Competition

There is an appetite for these products given that there is none offering leveraged exposure to bet on or against FAANG stocks. However, New Tech and Media ETF (AS:FNG) , which offers exposure similar to investments in high-performing technology and media leaders as characterized by the FANG stocks acronym, could give tough competition to FNGU. FNG has accumulated $47.1 million in AUM since its debut in July 2017 and charges 85 bps in annual fees.

Meanwhile, FNGD doesn’t have any real competitor that provides targeted inverse exposure to the FAANG stocks. The Direxion Daily Technology Bear 3X Shares TECS offers three times exposure to the broad technology sector by tracking the Technology Select Sector Index (see: all the Technology ETFs here).

Bottom Line

Given the strong fundamentals for the FAANG stocks, the new leveraged note could see large inflows and garner solid investor interest, thereby outperforming in the months ahead. Meanwhile, inverse ETN could face a rough patch.

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report

Netflix, Inc. (NFLX): Free Stock Analysis Report

Alibaba Group Holding Limited (BABA): Free Stock Analysis Report

Baidu, Inc. (BIDU): Free Stock Analysis Report

Facebook, Inc. (FB): Free Stock Analysis Report

Alphabet Inc. (GOOGL): Free Stock Analysis Report

Twitter, Inc. (TWTR): Free Stock Analysis Report

Tesla Inc. (TSLA): Free Stock Analysis Report

Apple Inc. (AAPL): Free Stock Analysis Report

NVIDIA Corporation (NVDA): Free Stock Analysis Report

ADVS-NW TEC MDA (FNG): ETF Research Reports

DIR-TEC BEAR3X (TECS): ETF Research Reports

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Inside The Leveraged & Inverse FAANG ETNs Launch

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