Animal Spirits are Back

Do you want to buy some garbage? There’s a growing number of investment products that some within the industry consider to be garbage, but they want to market them to investors like you anyways. Leveraged exchange traded products that double or triple the daily return (or its inverse) of a “hot stock” or the latest meme coin can sound like ways to strike it rich, but buyer beware. Before you get tempted to buy one of these products, please make sure you understand the risks associated with them, which we think deserve a warning label.

Animal spirits are back! Optimism is generally good for economic growth, but we know that human behavior can sometimes get a little overexuberant.

We have been collecting evidence of speculative (greedy) behavior in markets and mentioned some in our recent newsletters, like increasing purchases of options that expire the same day or the violent swings in Bitcoin. Wall Street’s eagerness and creativity in figuring out ways to exploit and profit from market sentiment is truly impressive.

Doug Cifu, the CEO of market maker Virtu Financial, had a memorable line on their recent earnings call: “You can’t swing a dead cat these days without hitting a new crypto product and new crypto ETF.”

This quote was pulled from a January 31, 2025, article in the Wall Street Journal about one firm that plans to introduce a suite of leveraged ETFs that will multiply the daily price moves of the recently launched Trump and Melania meme coins.

Leveraged ETFs that can offer 2x or 3x the daily price returns of an index, like the S&P 500, are not new.[1]^,[2] A more recent development is creating these magnified products for a single asset; if these meme coins can be considered “assets.”

These are extremely risky products that can only be considered speculative. As “investments” they shouldn’t be touched with a ten-foot stick (unless you are willing to otherwise light that money on fire for entertainment purposes).

The WSJ article references sentiment from some fund managers that they should be able to “sell investors any piece of garbage so long as you tell them it’s a piece of garbage.”

Public and visible disclaimers are common. Lottery games, for instance, are accompanied with: “Lottery games are based on chance, and should be played for entertainment only, and should not be played for investment purposes.”

Advertisements for investments need to provide a disclaimer about the inherent risks in investing, including the risk of loss, but we think some of these newer, more creative/dangerous securities should come with additional warnings.

A recently published Charles Schwab article points out that since 2006, approximately 600 exchange traded products have launched and nearly 40% of them have been liquidated![3]

As you look to put your valuable, hard-earned dollars to work, please be mindful of the difference between investing and speculating.

If you have any questions about this blog, or other questions about your finances, please contact Blue River Capital Management at 503.334.0963 or at info@brcm.co.

This information is intended to be educational and is not tailored to the investment needs of any specific investor. Investing involves risk, including risk of loss. Blue River Capital Management does not offer tax or legal advice. Results are not guaranteed. Always consult with a qualified tax professional about your situation.

[1] We want to stress the daily price change. Multiplying daily price changes can lead to drastically different returns than multiplying the return of a longer time period. For an extreme but illustrative example, if you had 2x exposure to something that goes from 100 to 50 to 150 over three days, you would have been completely wiped out on the down day (-50% * 2) and then not participated in the rise.

[2] Graph sourced from the Wall Street Journal: https://www.wsj.com/livecoverage/stock-market-today-nvidia-dow-sp500-nasdaq-08-29-2024/card/risky-etfs-have-never-been-this-popular-Lm2XRjou9UEZ68IUCFPQ

[3] https://www.schwab.com/learn/story/leveraged-inverse-etfs-going-going-gone

Why Diversify? Part 2

In our last blog post we looked at how adding bonds to a portfolio of stocks can have an outsized impact on the volatility of the portfolio as compared to the reduction in return. What can be less intuitive is that sometimes adding a riskier asset can also have positive impacts on the risk-reward characteristics of a portfolio. Read on for an example.