This is getting (ET)F’ed up.

ETFs or exchange-traded funds are some of the most streamlined ways to gain exposure to a variety of stocks all within one ticker symbol. There are tax efficiencies relative to their older sibling, the mutual fund. Mutual funds have gone out of style over the past few years, but still dwarf ETF’s assets under management. Mutual funds have roughly 3x the AUM of ETFs with many attributing 401(k) fund options to the vast difference.

Either way, ETFs have taken retail by storm. Everyone loves them. They’re easy to trade, can give you broad market exposure, and can be incredibly cheap. We use low-cost ETFs all the time at the firm. They’re amazing and truly a driving force in being able to get total market exposure even for the smallest of portfolios.

But this is Wall Street. Naturally, the simplicity and ease of launching an ETF have brought about some of the most speculative investments all wrapped into one ticker symbol.

We have active ETFs, leveraged ETFs, commodities-focused ETFs, digital asset ETFs, fixed-income ETFs, thematic ETFs, buffer ETFs, and now we might even have battle ETFs?

Saturated much? If you can think of an investment style, an asset class, or a leveraged strategy, there is likely an ETF in existence for that niche.

I recently stumbled upon a post on X explaining that someone has filed for a literal Battle ETF. Clifford Asness, a billionaire hedge fund manager and co-founder of AQR had this to say regarding the filing:

Funny enough, I had a similar reaction. To break this down for you in simple terms, the fund has a leveraged long position in one name along with a leveraged short position in another (usually a competitor). As if a leveraged long position was not enough to begin with, they also need a leveraged short in the competitor’s name.

When you hear leverage, you can think of borrowing or greater exposure. Essentially, leverage is having a position or exposure to a position larger than the amount of capital you originally had. Common ways to implement leverage are through borrowing or the use of derivatives. You may be familiar with options, which are a common way to gain leveraged exposure to an asset. Options allow for someone to gain more exposure to a position with less capital than if they were to buy or sell something outright.

So, back to the Battle ETFs. I read their filing, and this is what they disclosed: “The Fund’s strategy involves a leveraged long position in XYZ, generally targeting +180% to +220% of the Fund’s net assets, and a leveraged short position in ABC, generally targeting -80% to -120% of the Fund’s net assets. To be “long” means to have exposure to an asset with the expectation that its value will increase over time. Conversely, to be “short” means to have exposure to an asset with the expectation that it will fall in value.”

What fresh hell is this? An absolute speculative gambling fund is what this is.

There is a plethora of ETFs, many of them used by professionals or day traders, such as the 3x leveraged inverse Russell 2000 ETF. Because it is not enough to be short something, everyday individuals also need access to 3x the inverse performance of an index. (I am being sarcastic).

We’ve got covered call ETFs as well. Did you want to further your tax bill with a fund that sells covered calls and caps your upside exposure? There’s an ETF for that. I’m not sure of any young professional that would ever need exposure to such a fund. A covered call strategy is a neutral, income-producing strategy at best. This is not a capital growth strategy designed to tax efficiently compound capital for retirement.

Take a minute to read into what you are actually investing in. This wave of ETFs makes it all too easy for young people to get caught up in leverage, “yield maxxing” (or as I like to call it, tax-inefficiency maxxing), short positions, and active trading.

If you’re having a tough time understanding a fund’s investment strategy, that is a great indicator that it may be a poor fit for you. My biggest fear is that these niche ETFs are driving a culture of gambling and speculation among the younger, more “Robinhood-prone” investors.

As always, this is not financial advice. But it is wildly important to understand how your money is being allocated. It is never a bad idea to dig a little deeper and understand what is going on beneath the hood. Some of these ETFs are speculative and simply a distraction from wealth creation. Becoming wealthy does not happen overnight, no matter what these ETFs may offer.

As Warren Buffett says, “No one wants to get rich slow.” But that’s the best way to do it.

Check me out on X/Twitter, whatever we want to call it now:

Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!