(Bloomberg) — Want to go long Bitcoin holder MicroStrategy Inc. while cutting megabank JPMorgan Chase & Co.? What about the acquisition of streaming giant Netflix Inc. while dissing Comcast Corp.? Or confront Alphabet Inc. parent from Google v. New York Times Co.?
A host of potential new ETFs are offering to do all that — and more — as the retail boom for option-backed funds shows no sign of letting up.
Tidal filed Wednesday for eight so-called pairs trades — which go long and short two opposing stocks — in the exchange-traded fund's wrapper and under a trademarked tagline “Battleshares.” Proposed investment reasons include one that goes long for artificial intelligence chipmaker Nvidia Corp., but shorts semiconductor stalwart Intel Corp., another does the same for Tesla Inc. and Ford Motor Co. The ETFs, if launched, would use a number of different tools to do that, including short sales of securities, swaps and options, according to the filing.
This year, new firms and major Wall Street issuers have flooded the market with typically higher-fee ETFs that offer securities and derivatives products with different leverage and return profiles. The production conveyor belt has spawned any number of leveraged, inverse, buffer and covered call ETFs that fall under the umbrella of derivatives-based ETFs.
But the hype over these sometimes more dangerous products, which are gaining favor with the retail crowd, has its critics. Industry insiders question the glut of offerings and question whether retail investors understand all the risks involved.
“Thanks to the ETF industry for always pushing the envelope, but some of the new launches seem to go against the value proposition of diversified ETFs, cheap investments, to appeal more to traders and speculators,” said Athanasios Psarofagis of Bloomberg Intelligence.
Issuers, for their part, say their products are meeting investor demand — especially from the stay-at-home trader crowd. Derivatives-based ETFs have boomed in the US, with firms launching more than 160 new funds this year. Assets have grown sixfold in the past five years to $300 billion, according to data compiled by Bloomberg. The rapidly expanding category includes single stock funds that provide cumulative or inverse returns to a company, to a growing number of yield-focused funds. Many retail investors are attracted by the promise of large payouts for volatile moves.
Read more: '100%' returns are fueling a retail boom in new fast-money ETFs
Other Battleshares pairings include: crypto exchange Coinbase Global Inc. vs. Wells Fargo & Co., weight loss drug maker Eli Lilly & Co. against the owner of Taco Bell Yum! Brands Inc., and one that's betting on Amazon.com Inc. but looking for a drop in brick-and-mortar retailer Macy's Inc. The documents did not specify how much each of the funds would pay. Michael Venuto, Tidal's co-founder and chief investment officer, said the firm could not comment on the filing.
Battleshares funds are not the first to test pair trading strategies. In 2019, Direxion launched a growth versus value small-cap fund, a large versus small fund, and a cyclical facing protection strategy. All three were later liquidated. Meanwhile, a product from ProShares, launched in 2017 and long online but short brick-and-mortar-based stores, has just $9 million in assets.
“We've seen some success with leveraged single stock funds — that's probably the next evolution of that with leveraged pair trading,” said Todd Sohn, an ETF strategist at Strategas. “The tricky part, however, is finding a long and short trade that resonates with the trading community. On the surface, they make sense – but that can always change as market regimes come and go.”