What is FNGD? (Pros, Cons, and Strategies)

If you're interested in aggressive short-term trading strategies or you're hedging a long-position on major technology stocks, the MicroSectors FANG+™ Index -3X Inverse Leveraged ETN, commonly known by its ticker symbol FNGD, might be what you're looking for. In this blog post, we will delve into what FNGD is, explore its benefits and drawbacks, and discuss various strategies to maximize your investment.

What is FNGD?

FNGD is an exchange-traded note (ETN) that offers investors -3x leveraged exposure to the daily performance of the NYSE FANG+™ Index. This index includes highly traded technology and tech-enabled companies such as Facebook, Amazon, Netflix, and Google (Alphabet).

Unlike traditional ETFs, ETNs are unsecured debt obligations issued by financial institutions. FNGD is designed for short-term trading and is not suitable for long-term holding due to daily rebalancing and leverage-induced volatility.

Key Features of FNGD

• Provides -3x daily leverage on the NYSE FANG+™ Index
• The index includes tech giants like Facebook, Amazon, Netflix, and Google
• High volatility due to leveraged inverse exposure
• Composed of ten stocks that span across technology, internet, and media sectors

Due to the leveraged inverse nature of FNGD, holding it for multiple days can result in significant deviations from the expected return based on simple compounding of daily returns.

FNGD Composition

FNGD doesn't directly own the underlying stocks but mimics the -3x inverse daily returns of the NYSE FANG+™ Index, which includes:

• Facebook (FB)
• Amazon (AMZN)
• Netflix (NFLX)
• Google (GOOGL)
• Plus six other major tech companies like Apple (AAPL) and Tesla (TSLA)

This ETN is a speculative tool used mainly for short-term gains or hedging against a declining technology sector.

Pros of FNGD

High Potential Returns

FNGD provides the potential for high returns within a single trading day if the underlying index moves in the right direction. The -3x leverage can amplify your gains substantially, making it an attractive option for day traders.

Effective Hedging Tool

For investors with significant positions in tech stocks, using FNGD can serve as an effective hedge against market downturns. If the tech market declines, FNGD's inverse performance can help offset losses in your portfolio.

Short-term Flexibility

Due to its high leverage and daily reset feature, FNGD offers great flexibility for tactical short-term trades. Traders can capitalize on daily market movements effectively using this ETN.

Cons of FNGD

High Risk and Volatility

The main drawback of FNGD is its inherent risk and high volatility. Due to the leveraged inverse nature, a small positive movement in the underlying index can result in significant losses. This ETN is not suitable for long-term investments due to daily resetting and compounding effects.

Daily Rebalancing Risk

FNGD is designed to achieve its -3x leverage on a daily basis, which means daily rebalancing can erode returns over time, especially in choppy markets. The performance of holding FNGD for longer than one day can significantly deviate from your expectations.

Complexity and Fees

Leveraged ETNs are complex instruments and carry management fees and financing costs that can eat into profits over time. The complexity might be challenging for newer investors to fully grasp.

FNGD Investment Strategies

Given its high-risk, high-reward nature, FNGD requires a specific set of strategies to manage effectively. Below are some strategic approaches to consider when trading FNGD.

Day Trading Strategy

FNGD is primarily suited for day trading. Due to its daily rebalancing feature, holding positions overnight can introduce significant risks. Utilize technical analysis and market indicators to time your entries and exits precisely within a single trading day.

Hedging Strategy

Investors holding long positions in tech-heavy portfolios can use FNGD as a hedge against short-term downturns. This can help mitigate losses without needing to liquidate primary holdings during market volatility. Be aware that this strategy requires active management to avoid excessive holding periods.

Swing Trading Strategy

While mainly a day-trading tool, experienced traders might use FNGD for short-term swing trading during strongly trending markets. This involves holding the ETN for a few days at most, capitalizing on sustained market movements. Keep a close eye on market news and set strict stop-loss orders to manage risk effectively.

Conclusion

FNGD offers a way to potentially capitalize on short-term downward movements in the tech sector with amplified gains due to its -3x leverage. However, it comes with substantial risks and isn't suited for the average investor or long-term holding. Understanding its mechanics, associated risks, and suitable strategies is critical before diving in. For those prepared to navigate its complexities, FNGD can offer unique opportunities in a tactical trading playbook.