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Ferocious FANGs: Leveraged ETNs For The Tech Sector Debut

January 23, 2018 5:05 pm
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The FANG stocks – Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Google parent Alphabet Inc. (NASDAQ:GOOG) – can be an exciting bunch. For investors that need a little more FANG excitement, a pair leveraged exchange-traded notes should help.

The BMO REX MicroSector FANG+ Index 3X Leveraged ETNs (NYSE:FNGU) and the BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETNs (NYSE:FNGD) debuted today.

ETNs differ from exchange-traded funds in that the former are unsecured, unsubordinated debt instruments issued by a bank. In the case of FNGU and FNGD, that bank is Bank of Montreal. Ratings downgrades to an issuing bank's credit can affect ETN investors.

The Index

The new FANG ETNs track the NYSE FANG+ Index, which is equally weighted across 10 stocks. In addition to the FANG quartet, other stocks found in that index include Apple Inc. (NASDAQ:AAPL), Alibaba Holding Ltd. (NYSE:BABA), NVIDIA Corporation (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA).

Futures on the NYSE FANG+ Index debuted in the fourth quarter.

“Based on back-tested performance data, the combination of stocks in the NYSE FANG+ Index have returned a 29.1 percent annualized total return from September 19, 2014 to November 14, 2017, as compared to 15.9 percent for the NASDAQ-100, 10.5 percent for the S&P 500 and 19.1 percent for the S&P 500 Information Technology Index,” according to ICE.

Familiar Warnings

Leveraged products, ETFs or ETNs, aren't buy-and-hold investments. Rather, leveraged funds are designed to deserve daily leverage and can deviate wildly from that objective when held for extended periods.

“The notes are intended to be daily trading tools for sophisticated investors and are designed to reflect a leveraged long exposure to the performance of the Index on a daily basis, but their returns over different periods of time can, and most likely will, differ significantly from three times the return on a direct long investment in the Index,” according to a REX prospectus.

Leverage is reset daily, exposing investors to compounding of daily performance. That means over periods of more than a single index business day, the returns on the FANG ETNs (or any leveraged ETF or ETN) can be above or below the funds' stated objective.

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