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Microsectors FANG 3x ETN, FNGU, Down Only 78% This Year – Will It Recover?

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Updated 24 Jun 2022

Key points:

  • The BMO Microsectors FANG+ Index 3x Leveraged ETN is down 78% or so this year
  • Will it continue to destroy value here or start to recover?
  • it's an exchange-traded note, not an exchange-traded fund

The BMO Microsectors FANG+ Index 3x Leveraged ETN (NYSEARCA: FNGU) is down only 78% or so this year. The big question being whether it will continue to destroy value here or start to recover? And the thing is it can indeed continue to destroy because it's both a leveraged fund and also one that resets every day – it's an exchange-traded note, not an exchange-traded fund.

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The FNGU holding is based upon trying to replicate an index of the major tech stocks. More specifically, Facebook, Amazon, Apple, Netflix and Google's parent, Alphabet. Those are the FANGS, then there's another five added, Baidu, Alibaba, NVIDIA, Tesla and Twitter. It's an equally weighted note too, meaning that each of the ten accounts for 10% of the performance.

Of course, being a 3x note/fund the Microsectors FANG Index isn't simply holding the stocks – that wouldn't work to give the leverage. It's obviously working in options and futures in order to gain that outperformance – or, when tech stocks are falling, that underperformance of course.

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That the tech market is sliding is what has caused FNGU to fall – it is at least doing its job of mirroring its index. The leverage is what makes the fall worse than the market itself. Leverage up also leads to leverage on the way down too. Year to date on the five majors is Amazon 38% down, Micorsoft 22%, NVIDIA 45%, Facebook (Meta, if we prefer) 42% and Google 23%. It's mostly that leverage which explains the 78% fall on those component price changes.

Not all though, for there's a cost to being able to gain that leverage through options etc. Which is, of course, that options cost money. So, there are operating expenses to consider as well – even if the market remained absolutely static, as did all the components, FNGU would still lose money over time.

This is why we strongly suggest that individual shareholders don't think of any leveraged ETFs (or ETNs, as here) as things to hold. They have their place in rapid trading strategies, possibly even as hedges for other positions. But they're simply not thing to hold over time, whether looking at bull or bear positions.

It's also true that as the Microsectors FANG resets every night it doesn't in fact mirror the supposed index all that well. It tracks the within-day movements just fine, but over time it does wander from the supposed reference price.

As to what might make the FANG+ ETN rise again that's obvious enough. We need a rise in the value of the FANG stocks. But given the construction and costs of this specific Microsectors ETN we need swift movements within the day. For that's what it's constructed to capture and it does what it's supposed to well. Anyone who wants to bet on that is of course welcome to but in a time of rising interest rates that might not be quite the wisest trade.

The real lesson here is that the BMO Microsectors FANG+ Index 3x Leveraged ETN is just not for any form of long term holding at all, That's not how it's made, not what it's for. It's a speculative tool for day trading or hedging and needs to be treated as such.