Got guts? And, do you want market-beating returns?
You typically need the former to get the latter, of course, since a greater reward requires taking on greater risk. And, you must also take the right risks … ones that pay off rather than chew up your capital. Fortunately, just applying a little common sense and being patient will go a long way in this regard.
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With that as the backdrop, investors looking to spice up their overall returns without making their portfolio more complicated might want to take a look at the MicroSectors Solactive FANG Innovation 3x Leveraged ETN (NYSEMKT: BULZ). This exchange-traded note (ETN) is not for everyone — but it may well be a good fit for you.
Image source: Getty Images.
What’s the MicroSectors Solactive FANG Innovation 3x Leveraged ETN?
There’s a good chance you’ve never heard of it; plenty of investors haven’t. This fund’s $1.5 billion in assets is a pittance compared to the size of more familiar exchange-traded funds (ETFs) like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or the Invesco QQQ Trust (NASDAQ: QQQ), underscoring investors’ lack of interest in what it offers.
Don’t dismiss the prospect simply because it’s not drawing a huge crowd, however. That doesn’t mean it doesn’t have a potential place in your portfolio.
Cutting straight to the chase, just as the name suggests, the MicroSectors Solactive FANG Innovation 3x Leveraged ETN is an exchange-traded instrument that on any given day moves three times as much as the so-called FANG stocks like Amazon, Alphabet, Meta Platforms, and others collectively do.
It’s not just the original FANG names, however. The Solactive FANG Innovation Index that it is meant to mirror also includes the FANG companies’ most important technology peers, such as Nvidia, Palantir Technologies, and Broadcom. All told, the index and fund reflect the daily collective performance of 15 of the market’s hottest stocks of its most important companies of late, multiplied by a factor of three. These are mostly tech names, of course, operating within high-demand industries like artificial intelligence (AI), mobile devices, and cloud computing, just to name a few.
One key difference between BULZ and leveraged ETFs? It’s not weighted by its constituent companies’ market capitalizations. It’s an equal-weighted investment, meaning each constituent’s contribution to the ETN’s net daily movement isn’t crimped or augmented just by that company’s smaller or bigger size. This is arguably a healthier balance.
And if you’re wondering, an ETN is an exchange-traded note. They trade just like ETFs, and for all practical investing purposes, can be seen as the same. The big difference is that an ETN doesn’t technically hold the stocks in question. The ETN’s issuer does, while its manager makes any buying and selling decisions. In this instance, the Bank of Montreal holds the underlying assets that are managed by a third-party asset manager called REX Shares.
It’s a broadly compelling prospect. However, there are three very specific reasons to own a piece of this exchange-traded note.
Data by YCharts.
Reason No. 1 to buy: An easy way to invest in all the market’s most promising growth stocks
One of the chief complaints about the recent market environment is that only a handful of stocks have produced most of the marketwide gains. Owning each one of them individually could require an overwhelming amount of effort, yet owning an instrument like QQQ or an S&P 100 index fund could still saddle you with too many laggards. The MicroSectors Solactive FANG Innovation 3x Leveraged ETN is one of the few ways to own most all the best names without owning too many underperformers.
Reason No. 2 to buy: It’s also an easy way to produce market-beating growth
That being said, if an investor is specifically looking for stocks like Nvidia, Palantir, and Amazon, it’s a reasonably safe bet that they’re also looking for above-average performance. BULZ offers even more of this performance than they could ever achieve simply by buying and holding these tickers alone. REX uses derivatives to amplify the daily moves these stocks are making, by a factor of three. If these tickers are on the rise, BULZ is rising much, much more.
Reason No. 3 to buy: BULZ is a regularly balanced equal-weight fund
Finally, another one of the top complaints about recent market dynamics is how a small handful of high-performing stocks like Apple and Nvidia have caused indexes (and therefore, index funds) to become top-heavy. That just means the market’s very biggest companies are now overrepresented. Should these individual mega-stocks start to peel back from their big gains, funds and indexes could take an exaggerated hit.
The MicroSectors Solactive FANG Innovation 3x Leveraged ETN is reasonably well-protected from such an exaggerated setback, though. The underlying Solactive FANG Innovation Index is rebalanced to an equal weighting every month, curbing much of the potential for excessive volatility.
That being said, there are even more downsides to consider before stepping into this particular leveraged fund.
Data by YCharts.
Reason No. 1 to avoid: Its volatility could be outright sickening
Volatility is fine as long as it’s working in your favor. Things dramatically change, however, when the market’s darlings start to lose ground, and you’re watching your positions lose value three times as quickly. This sort of loss can create a panic, and investors don’t always make the best decisions under duress.
Reason No. 2 to avoid: The underlying premise of the ETN could eventually fail
The idea behind a FANG-focused fund that also includes most of the market’s other hottest stocks makes sense right now because it’s working — these are the market’s must-have names. But nothing lasts forever. There may come a time when these stocks aren’t leading the marketwide bullish charge. While REX can swap the ETN’s current holdings with more relevant and innovative names in the future, there’s no assurance it will do so to your satisfaction.
Reason No. 3 to avoid: BULZ isn’t cheap to own
Although it’s a pittance compared to its potential upside, by index fund standards, the MicroSectors Solactive FANG Innovation 3x Leveraged ETN costs more than average to operate. Its expense ratio is in the ballpark of 1% of its assets, shaving down your annual net gains by that amount.
Reason No. 4 to avoid: Even the Bank of Montreal says it’s not a great “buy and hold” investment
Given that it’s the issuer and arguably has the most to gain by attracting new investors, you’d expect the Bank of Montreal to be the ETN’s biggest cheerleader. But, nope.
In its own prospectus on BULZ, the bank warns that its exchange-traded notes are “not intended to be ‘buy and hold’ investments.” It explains, “If you invest in the notes, you should continuously monitor your holding of the notes and make investment decisions at least on each Index business day, or even intraday.”
In a similar time frame-minded sense, know that this particular ETN has a planned expiration date of June 28, 2041, but Bank of Montreal could also choose to shut it down anytime between now and then.
Weighing the risk against the reward
The downside certainly seems to outweigh the upside. And for most investors, there arguably is too much risk here to justify what’s admittedly an impressive degree of potential reward.
If you can read the prospectus’s warning for what it actually likely is, though — boilerplate language meant to discourage inexperienced investors from becoming a legal liability — there’s a limited-use case to be made here. Although the Bank of Montreal appears to be discouraging long-term investors while encouraging short-term-minded ones, short-term trading is already difficult to do well; this ETN could make it even trickier. True buy-and-hold investors willing to stick with these 15 stocks for years on end, despite how they perform in the meantime, conversely, would be even more rewarded for their patience with a position in BULZ.
Just don’t get crazy. Even these committed investors will want to keep any position in the MicroSectors Solactive FANG Innovation 3x Leveraged ETN relatively modest, as a means of limiting their risk.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
