Leveraged Strategies to Play the ‘Magnificent Seven’
These products are not for the faint of heart.
Investors looking to make a high-stakes bet on this summer’s market direction—either long or short—might consider several leveraged products: the MicroSectors FANG+ Index 3X Leveraged ETN (FNGU), the MicroSectors FANG+ Index 2X Leveraged ETN (FNGO), and the MicroSectors FANG+Index -3X Inverse Leveraged ETN (FNGD).
Most of this year’s S&P 500 gains have come from seven tech stocks—the so-called Magnificent Seven, according to Jim Cramer’s June 1 nod to the 1960 film.
Together, these companies have deadlifted an impressive 53% since Jan. 1, while the remaining 493 index constituents remained essentially flat. They include Meta Platforms, Amazon, Alphabet, Apple), Nvidia), Microsoft and Tesla.
The exchange-traded notes offer a perfect way to play the trade. They have 10 holdings in total—the magnificent seven in addition to Netflix, Snowflake and AMD—that are just about equally weighted.
The three long ETNs have had a scorching hot run so far. FNGU, which offers 3x leveraged exposure to the 10 stocks, and is up 283.18% so far this year, while FNGO and FNGS—a straight, nonleveraged product—are up 160% and 66% year to date, respectively.
It was likely Nvidia’s impressive quarterly report on May 24 that really conjured the Seven into existence. The company reported quarterly revenue of $7.2 billion—up 13% YoY—and well above analyst estimates of $6.5 billion, as well as a gross margin of 66.8%, itself the highest over the past four quarters. Diluted earnings per share impressed at $0.85, up 28% year over year and above 44% from the prior quarter.
However, the truly magnificent, Yul Brenner-esque aspect to all of this was management's guidance for 2Q revenue of $11 billion, up an astounding 52% from its terrific 1Q. Various analysts weighed in the following week and now expect Nvidia’s revenue to triple in just four years, reaching $83.6 billion by fiscal year 2027.
Management’s guided forecast suggested that a surge of AI-related corporate spending, in addition to the end of Fed hikes and a resilient job market, will essentially keep the tech economy from a deep recession scenario.
Of course, the counterargument is that the P/E’s of these seven stocks are already too high. Why pay 50-100x earnings for growth that might not materialize?
In fact, this is what a classic sucker’s rally looks like: A narrow surge of the prior boom’s leadership that will be pulled down this fall as the economic shortfall due to resumed student loan payments, commercial real estate defaults, and a tighter bank lending will put a damper on any AI-fueled market exuberance.
If you like this darker perspective, then the MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD) might be a tempting trade. The market is likely to drift down in the ensuing weeks when traders hit the cash register before their vacations, and when broader macro factors take precedence over individual earnings.
The enormous run in FNGU we have seen since early May has hit its 200-week moving average.
Its relative strength index of 76.94 suggests it’s very toppy. A reversal after so many weeks of gains looks likely.
Of course, applying leveraged bets to the most souped-up stocks in the index is not for the faint of heart. It is a short-term trader’s game. As Steve McQueen’s character Vin Tanner states early in “The Magnificent Seven” film: “We deal in lead, friend.”
