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The Magnificent 5X: Your Weekly Reminder That We've Learned Nothing

Picture of Bernie Thurston
In what can only be described as the financial markets' version of “hold my beer,” this week brought us a delightful buffet of leveraged ETPs that make 2021 look downright conservative.

Let me paint you a picture of what just hit European exchanges:

The Menu

  • 5X Long Magnificent 7 (because 2x exposure to trillion-dollar tech companies wasn't spicy enough)
  • 4X Long Semiconductors (chips! but make it dangerous)
  • -5X Short SPY (for those who want to lose 10% when the market goes up 2%)
  • -5X Short Nasdaq 100 (same energy, different index)
  • -5X Short 20+ Year Treasuries (betting against bonds with the intensity of five hedge funds)
  • 3X Long/Short Gold Miners (because gold mining stocks needed more volatility)

And my personal favourite: LS Short Volatility Long Tech – a product that simultaneously bets volatility will stay low while going long the most volatile sector. It's like ordering a Diet Coke with your deep-fried Oreos.


The American Contribution

Not to be outdone, the US markets blessed us with Defiance's 2X Short QBTS ETF – a leveraged inverse bet against a single quantum computing stock. That's right: someone looked at D-Wave Quantum's stock chart, considered all the ways to express a bearish view, and thought “you know what this needs? Daily resets and 200% inverse exposure.”
The prospectus helpfully notes you could “lose your entire principal within a single trading day.” Not might. Could. They did the math.


What This Tells Us

We're in that special phase of the market cycle where:
1.    Volatility products are proliferating (always a calm, rational sign)
2.    The leverage multiplier is in an arms race (5x today, 10x tomorrow?)
3.    Someone greenlit products that short volatility AND go long tech (simultaneously betting on boring stability and exciting growth)
4.    European retail investors can now access 5x leverage on the Magnificent 7 (democratisation!)


The Timeline

2020: “2x leverage seems aggressive”
2022: “3x is probably the limit”
2024: “4x feels irresponsible”
2025: “Introducing 5X LONG MAGNIFICENT 7”
2026: checks notes “Would you like 10x leverage with that? ”


A Thought Experiment

If the Magnificent 7 drops 10% in a day (perfectly reasonable given their weights and correlations), your 5X Long position loses 50%. If it rallies 10% the next day, you're not back to even – you're at -25% due to compounding.

Add in European market hours, overnight gaps, and daily resets, and you've created a financial instrument that makes lottery tickets look like municipal bonds.


The Punchline

Twenty-seven leveraged products launched in a single two-day window. Not broad-based beta exposure. Not diversified strategies. Pure, concentrated, leveraged bets on semiconductors, tech giants, and quantum stocks that don't have revenue.
This is fine. Everything is fine.

The last time we saw this kind of product innovation was... checks notes ...right before things got interesting.



 

Bernie Thurston

Bernie loves data. Fortunately for him, London’s finance industry has been indulgent, providing him lots of benchmark data to play with and enjoy. Bernie’s journey began at Sky, where he designed the first interactive television and helped build a technical-based charity (ctt.org). He then hopped over to finance, and soon found himself at a start-up working on dividends and derivatives. Then, by nature of the fact that finance and technology have rapidly conjoined, he found himself working with Credit Suisse to build an index aggregation and distribution platform. Markit then acquired the start-up and Bernie battled his way up the greasy pole becoming the Managing Director of Markit’s equities division, with responsibility for index, ETF and Dividends. But the siren song of startups called once more. And Bernie was headhunted to rescue a failing index business. Over five years, he helped reverse the fortunes of DeltaOne Solutions, turning into a fighting force. So successful was the turn around that Markit came along and acquired this company as well. But Bernie still loved start-ups. To that end, he founded Ultumus, an ETF and benchmark data company. Ultumus aims to provide the best data in the most timely and consumable manner possible. With clients on both buy and sell side, when something happens in the index or ETF industry, Ultumus is the first to know.

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