Another example of the casino-like nature of the U.S. stock market in the eyes of "Oracle of Omaha" Warren Buffett.
A recently launched exchange-traded fund (ETF) on Wall Street ( ETF ) has further blurred the line between investment and gambling. This month, Roundhill Investments, a issuer specializing in innovative financial products, released the Roundhill S&P 500 Target 10,000 Points 2030 ETF. This ETF essentially provides investors with a long-term leveraged bet on whether the S&P 500 index will continue to rise.
It is required to increase by at least 8%.
According to the contract, the fund holds option contracts, and the rise and fall of its net value are determined by the value of these option contracts. These options are linked to tracking the ETF of the S&P 500. As the index approaches 10,000 points, the value of the options is likely to increase, and so is the probability of making a profit from exercising them.
As time passes and the expiration date approaches, options will continue to lose value. The rate of time decay for long-term options is relatively slow. The remaining time until expiration and the volatility of the underlying index are the two key factors that drive the price of this ETF. If on January 10, 2030, the expiration date of the option, the S&P 500 index is above 10,000 points, these options will generate substantial profits. If the index does not meet this level, the options will be worthless upon expiration.
On Monday, ETF fell by 0.26%, while the S&P 500 index fell by 0.06%. Drew Pettitte, the chief investment officer of Roundhill, stated that these options currently provide approximately 5.5 times leverage for ETF. The early performance of the fund directly reflects this volatility: FactSet data shows that on October 2nd, when the S&P 500 rose by 0.7%, ETF rose by 7.4%; on October 8th, when the S&P 500 fell by 0.5%, ETF fell by 4.9%.
In recent years, a large number of ETF products have emerged that use derivatives such as options to provide investors with leverage exposure to indices, individual stocks, or assets. However, the vast majority of these products are aimed at intraday traders and utilize a daily reset leveraging mechanism. Unlike the hundreds of leveraged and inverse ETF products that existed before, the initial design intent of this particular Roundhill ETF product was to engage in long-term leveraged trading based on the performance of the S&P 500 index.
The S&P 500 index had recorded double-digit gains for three consecutive years prior to this, and at the beginning of this month, it once again reached a new historical high. For many investors, the goal of 10,000 points seems within reach. To achieve this goal, the S&P 500 index only needs to achieve an annualized compound growth rate of about 8%.
Dow Jones market data shows that this is slightly higher than the historical long-term average: since 1928, the compound return on price of the S&P 500 excluding dividends has been 6.4%.
Essentially similar to gambling
ETF.com President and Research Director Dave Nadig analyzed that this fund acts as if it can predict the market, allowing investors to place a “binary bet” on a predetermined outcome, which is precisely where its speculative nature comes from. However, because leverage is involved in a long-term form and it is packaged as a ETF product, potential buyers tend to underestimate the risks. “This is a very peculiar way of participating in the market; it falls under the category of gamified investing,” Nadig said.
Leveraged products ETF generally carry high risks and significant volatility, but their numbers have seen explosive growth in the past few years. At the same time, an increasing number of speculative products have sparked a new wave of issuance enthusiasm for ETF. Nadig stated that from the perspectives of industry culture and marketing, many new products in the ETF industry over the past year have a high degree of speculative nature, akin to gambling. "Now there are people trying to embed gambling into every corner of the financial market. I strongly oppose this."
Last month, Berkshire Hathaway announced that Warren Buffett would step down from his role as chairman and take on the position of honorary chairman of the company, which is headquartered in Omaha, Nebraska. He will continue to serve on the board of directors. After sixty years of dedication, he has become a iconic figure in the field of investing, and his value investing philosophy has become a classic. During his tenure, Berkshire achieved an annualized compound return of nearly 20%, while the S&P 500 index only had an annualized return of 10% during the same period.
CBN reporters have summarized that Buffett has also mentioned index funds multiple times in his shareholder letters. In 2013, he advised the person in charge of managing his wife's assets to invest 90% of the funds in a S&P 500 index fund. In 2017, this "Prophet of Omaha" gave investors the advice, "When trillions of dollars are managed by Wall Street professionals who charge high fees, it is usually the managers who reap huge profits, not the clients. Both large and small investors should insist on using low-cost index funds."
Since the beginning of this year, Buffett has repeatedly made sharp criticisms of the current stock market, arguing that it is increasingly dominated by short-term speculative trading rather than long-term value investing. At Berkshire Hathaway's annual meeting in May, he compared the stock market to "a church with a casino attached to it."
Buffett has also always advised investors to avoid using too much leverage. "In my opinion, it's crazy to risk one's own wealth in exchange for something that doesn't belong to you (i.e., using leverage). Even if it doubles the net value of the investment in such a situation, I wouldn't feel happy about it."
