By Michael Wursthorn
The FANG stocks are already sinking their teeth into 2020.
The long-running FANG trade of buying highflying technology stocks including Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. is continuing to pay off for investors this year. All four stocks are up at least 2%, led by Facebook, which has surged 8.1%.
Those gains have pushed one exchange-traded product that tracks those stocks and uses leverage to magnify its returns near the top of the leaderboard.
The MicroSectors FANG+ Index 3X Leveraged exchange-traded note is up 28% this year, better than most of the other 2,300 exchange-traded products listed in the U.S., including other leveraged and nonleveraged products, according to Morningstar. That follows a 117% rise last year.
The note, launched by Bank of Montreal in 2018, tracks an index that has an equal exposure to 10 technology and communication stocks, including the FANG companies, as well as Tesla Inc., Apple Inc., Nvidia Corp., Twitter Inc., Baidu Inc. and Alibaba Group Holding Ltd. All of those stocks have outperformed the broader market through the first two weeks of the year.
But the FANG+ note takes on additional layers of risk to deliver an even bigger return.
Unlike an exchange-traded fund, exchange-traded notes don't own a portfolio of assets. They are debt issued by a bank, similar to a corporate bond. Banks then promise to pay a return to the investor linked to the performance of the assets they track. If the issuer collapsed and couldn't pay off the debt, the investors could lose everything. ETFs, on the other hand, generally can liquidate their assets.
The note also uses derivatives to magnify the moves of the underlying index. So while the index tracked by the note is up just 8.7%, the FANG+ note has risen more than three times that.
The leverage, however, works both ways and has the potential to magnify losses, making the strategy especially risky during volatile periods.
Even without the leverage, FANG stocks remain outperformers. The S&P 500, which has risen 1.8% in 2020, trails the 10-stock FANG index by about 7 percentage points.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
Corrections & Amplifications
This article was corrected on Jan. 15, 2020 to show that the MicroSectors FANG+ Index 3X Leveraged exchange-traded note, which was up 28% as of Monday, had risen more than three times the index it tracks, the NYSE FANG+ index, which was up 8.7%. The original version incorrectly said it had risen nearly three times the index it tracks.