These Geared ETNs Bucking Trend

ETNs as a wrapper may be losing ground, but demand for Microsectors’ geared strategies is strong.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Greg KingExchange-traded notes have had a tough go this year, leading the ETF market in closures, and losing popularity—and ETF market share—with investors. That has been particularly true of leveraged and inverse strategies in a year when market volatility came back strong. But REX Shares and its lineup of 19 Microsectors ETNs, offered through the Bank of Montreal, are bucking that trend. As a group, they crossed the $1 billion in assets mark this year, showing that demand for some ETNs—including leveraged and inverse strategies—remains strong. Greg King, CEO and Founder of REX Shares, tells us what’s working and what’s ahead. REX Shares recently crossed $1 billion in assets under management. It’s a milestone I’ve seen characterized as an “overnight success.” Overnight goes a long way here, right?
Greg King: We’re an overnight success that’s five years in the making. We've had a big year in 2020 in terms of adoption of the products and hitting that sweet spot of an inflection point, really. What's interesting about REX’s success in 2020 is that when volatility is high, it can be really challenging for leverage and inverse strategies, which most of yours are. It can catch a lot of investors by surprise if they don't fully understand the daily reset and compounding. But REX keeps on growing.
King: Our success has been driven by a couple of things. No. 1, the market saw a big influx of self-directed traders this year, which continues a multiyear trend. When everyone was home during coronavirus, people got a chance to pay a lot more attention to their trading accounts, and did some of their own investing. Some of the discount brokerages had big numbers in terms of new account openings. That's a trend that’s continuing to grow regardless of coronavirus.

No. 2, our biggest success came with our FANG suite of products, which are linked to the NYSE FANG+ Index. We have both the long and the short, so we can capture both sides of the interest from investors. But FANG stocks have really been in the center of the news for the whole year, so that’s been helpful.

But you're right about the effect of leverage on these products in volatile markets. It tends to erode capital. The reverse is also true where, in consistent markets, these products can actually experience exponential growth. Coming out of COVID-19, that's what we had—a lot of consistent climbing up out of the bottom created after the virus initially took hold. Your asset-gathering success this year goes counter to what we're seeing in the broader industry. Data suggests ETNs are becoming less and less popular with investors, especially geared strategies. We’ve seen lots of closures. How are you bucking that trend?
(Read: “Leveraged & Inverse ETN Extinction”)
King: I was interested in investing at a young age, 13 or 14, reading books about Warren Buffett and Peter Lynch, and I remember coming across this chapter where Lynch would explain that it was possible to be very successful in industries that were on the decline. He cited a couple examples in the industrial space. Whether or not that's the case for leverage products or for ETNs, I don't know.

I think these things wax and wane, honestly. But I think we've been successful by putting out products that we know investors want. And we know that a certain subset of investors wants to trade leveraged products, and we know that there are certain themes out there that investors are focused on. That's where we're focusing our efforts. You don't think the ETN business is going into extinction, then.
King: I don’t think it's going into extinction. It's a phase. Each ETN issuer is different, and has their reasons for what their focus is. I don't think ETNs are going away, and I don't think leverage products are going away either. What’s the process of developing a new “Microsector”? And why “micro,” as you call it? Some of them, like financials, are actually quite massive.
King: The concept is the idea of picking targeted subsectors. If you say “sector” in the active management space, it's often pretty broad, as is financials. In financial indices, you’ll typically see banks, insurance companies, credit card companies, even REITs sometimes.

We think in cases where investors are looking at a targeted exposure, they want something to express a view, or hedge the portfolio, and a lot of times they're looking in financials for banks, so why not create a bank-focused index that’s 10 stocks? Keep it simple. It's not about the size of the company. In fact, most of our products are very mega-cap-tilted. It's more about the narrowness of the target. Your ETNs are offered through BMO. Can you tell us a little bit about what that collaboration looks like when you’re creating a new ETN?
King: It's truly a collaboration. We come up with the initial concepts and share them with the team at Bank of Montreal. It's a joint effort. It's their ultimate decision in terms of what they can support and hedge, and what gets approval to get launched. But we're the index provider behind the Microsectors indices licensing to the bank. We come up with the initial concepts. In the past five years, have you learned anything interesting about the challenges or benefits of running ETNs? Would you consider ETFs as well?
King: We have this leveraged ETN suite in partnership with the Bank of Montreal, but we're working on a number of other exchange-traded products that are not ETNs and not leveraged. We like to think that we’re structure-agnostic. It's more about the investor concept; it's more about how can we bring something that’s alternative strategy-focused, because that's our mandate. We think of ourselves as architects of alternative exchange-traded products.

For this suite of ideas, yes, ETNs seem to work best. There are pros and cons. One of the benefits of ETNs with these types of products is that the market-making community feels more comfortable with ETNs because the leverage is a contractual obligation of the issuer rather than a best-effort type of portfolio management service by the fund manager in the case of an ETF. That’s a benefit to ETNs. Can you share anything about your plans to enter the cryptocurrency, bitcoin space?
King: We incorporated a subsidiary called Osprey Funds a couple years ago to focus on crypto-based products. While we were early to the space—I invested in bitcoin in 2013, and we were actively talking to futures exchanges in 2016 about bitcoin futures as a way to bring a bitcoin ETF potentially to market—we’ve taken a measured approach to actually building product because we want to make sure we're doing it right. But we’re working on it, and we hope to have more to say on that in the very near future.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.