FNGB's Hidden Costs and Risks: A Cautionary Tale for Retail Investors in Volatile Markets

The allure of leveraged exchange-traded notes (ETNs) lies in their promise of amplified returns, but beneath their seductive surface lurk costs and risks that make instruments like the 3x Long FANG+® ETN (FNGB) a perilous proposition for most retail investors. As markets grow increasingly volatile, the structural flaws of these products—coupled with their high fees and issuer-specific risks—demand scrutiny.

The FNGB Structure: Leverage with a Price

FNGB, issued by Bank of Montreal (BMO), offers three times the daily performance of the NYSE FANG+® Index, which tracks 10 high-growth tech stocks. While its expense ratio currently sits at a discounted 0.35% (until August 20, 2025), it jumps to 0.95% thereafter—a stark reminder of how costs can escalate. Unlike ETFs, ETNs are unsecured debt obligations, meaning investors also assume credit risk tied to BMO's financial health.

The Double-Edged Sword of Daily Leverage

Leveraged ETNs like FNGB reset daily to maintain their exposure ratio, a process that amplifies both gains and losses. However, this mechanism creates a compounding trap: even in a neutral market, volatility can cause cumulative losses due to mathematically assured decay. For example, if the FANG+ Index rises 10% over five days but fluctuates daily, the leveraged ETN's returns may diverge sharply.

Consider a hypothetical scenario where the index gains 2% on Day 1, loses 1% on Day 2, gains 3% on Day 3, and loses 2% on Day 4. The net index return is +2%, but FNGB's 3x leverage would yield:
- Day 1: +6%
- Day 2: -3%
- Day 3: +9%
- Day 4: -6%
Final result: A 6% loss versus the index's 2% gain.

This phenomenon, known as volatility decay, becomes catastrophic in highly volatile markets. FNGB's technical metrics underscore this: its 200-day volatility of 72.91%, beta of 3.77, and standard deviation of 114.40% signal extreme price swings that few retail investors can stomach.

Risks Beyond Leverage

• Credit Risk: As an ETN, FNGB's value depends entirely on BMO's ability to meet obligations. Defaults in the ETN market are rare, but they highlight an added layer of uncertainty.
• Liquidity Risk: Low trading volumes or sudden redemptions could trap investors in illiquid positions, as seen with the FNGA ETN's abrupt redemption earlier this year.
• Fee Escalation: The impending jump in expense ratios post-August 2025 adds another layer of cost pressure, eroding returns further.

Suitability for Retail Investors? A Resounding No

Retail investors, often lacking the tools or time for daily monitoring, are particularly vulnerable to FNGB's pitfalls. The product's design—intended for sophisticated, active traders—conflicts with the buy-and-hold mentality common among casual investors. Even short-term holders face challenges: volatile markets can lead to unexpected losses, while the need to rebalance positions daily demands constant attention.

The Bottom Line: Proceed with Extreme Caution

FNGB's high costs, structural risks, and susceptibility to volatility decay make it a tool better suited to hedge funds or day traders with robust risk management frameworks. Retail investors should:
1. Avoid long-term holds: Use FNGB only for ultra-short-term bets, if at all.
2. Monitor BMO's creditworthiness: A downgrade in BMO's ratings could trigger panic selling.
3. Compare alternatives: Unleveraged ETFs like the FANG+ ETF (WEBL) offer exposure to the same index without compounding risks.

Final Thoughts

In a world of market turbulence, instruments like FNGB exemplify the adage: “Leverage turns volatility into risk.” For most investors, the high fees, credit risks, and mathematical headwinds of leveraged ETNs far outweigh their speculative appeal. Stick to products designed for stability—or prepare to weather storms you may not survive.

This analysis does not constitute financial advice. Always consult a qualified advisor before making investment decisions.