(Bloomberg) -- It’s the latest high-octane offering from Wall Street’s rapidly growing line-up of risky ETF filings: Leveraged products that amp up exposures to large-cap stocks and crypto in one fell swoop – giving traders a way to double down on two of this year’s best-performing assets.
Florida-based Volatility Shares filed last week to launch a series of exchange-traded funds that seek to layer equity investments on top of digital tokens. The pitch is that by going all-in on derivatives, investors can get a $100 bet on US shares along with $100 of crypto exposure, for just a $100 outlay in total.
At first blush, the products follow a levered approach known as portable alpha that’s now enjoying something of a renaissance, after misfiring in the global financial crisis. Yet, proponents like Newfound Research and AQR Capital Management typically seek to throw uncorrelated assets into the portable-alpha mix, like stocks and bonds, or stocks along with market-neutral trades.
Volatility Shares is proposing to flip the diversification script altogether, with “One+One” ETFs that combine the S&P 500 and Bitcoin, the S&P 500 and Ether, the Nasdaq 100 and Bitcoin, the Nasdaq 100 and Ether, Bitcoin and Ether, and more.
It’s not for the faint of heart, by design. Riding highly correlated strategies with leverage in this way maximizes returns on the way up — and intensifies the pain on the way down. When the S&P 500 dropped 8% in the three weeks through early August, for instance, Bitcoin suffered losses twice as large.
“Stacking S&P 500 and Bitcoin futures can be an effective way to get leveraged exposure to each,” said Bryan Armour, director of passive strategies research at Morningstar Inc. “But stocks and Bitcoin tend to drop together when markets sour, making these ETFs highly risky.”
Volatility Shares, which launched its first leveraged ETF in 2022 and has since amassed around $4.7 billion in total assets, declined to comment.
To keep exposures steady, the money manager is proposing to rebalance the “One+One” fund should the difference in the duo assets’ weights exceed 20 percentage points on two consecutive market closes, according to the prospectus.
The filings are the latest sign that upstart ETF firms have plenty of newfangled trades left to pitch to speculative traders gorging on risk this year, defying naysayers who argue the $10 trillion market is already saturated.
Portable-alpha strategies are also gaining favor in this corner of money management. The strategy can deliver solid risk-adjusted gains in the good times, but famously burned pensions and endowments alike during the global financial crisis, in part because of the hidden risk of concentrated wagers.
Conscious of these kind of risks, Corey Hoffstein, chief investment officer at Newfound Research, has sought to spread holdings among diverse assets in his suite of “return stacking” ETFs. While the entry of Volatility Shares indicates a wider adoption of the concept, he has some reservations.
“Our preference is towards assets and strategies that have historically exhibited low correlations to stocks and bonds,” said Hoffstein. “That said, stacking something that has high correlation, but not perfect correlation, can still add value when sized appropriately.”
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