Another Weapon of Mass Destruction?

Right after we published our thoughts on ETFs and their impact on the markets

Are ETFs Weapons of Mass Destruction?
Why is Volatility so Low?

CNBC reported that a new leveraged ETF is coming to the market. Its leverage is 4 times the daily SP500 returns

ForceShares has introduced two new exchange-traded funds that deliver four times the returns, either higher or lower, of S&P 500 futures. The ForceShares Daily 4X US Market Futures
Long Fund and ForceShares Daily 4X US Market Futures Short Fund are designed to return 400 percent of the performance of the index.

While such “leveraged” ETFs are hardly new — a plethora of products offer double or triple up or down movements in various parts of the market — this marks the first time a quadruple fund has been launched.

Some market participants worry that the temptation of such outsized returns will be impossible to resist, with dire results possible. Read more

This reminds us of CDO (Collateralized Debt Obligation) squared:

A special purpose vehicle (SPV) with securitization payments in the form of tranches. A collateralized debt obligation squared (CDO-squared) is backed by a pool of collateralized debt obligation (CDO) tranches. 

This is identical to a CDO except for the assets securing the obligation. Unlike the CDO, which is backed by a pool of bonds, loans and other credit instruments; CDO-squared arrangements are backed by CDO tranches. CDO-squared allows the banks to resell the credit risk that they have taken in CDOs. Read more

Can you see what is going on here?

ByMarketNews