The S&P 500 closed at 7,666.45 on Thursday, Oct. 1, meaning that the percentage gain (dropping the 0.45) need to get to 10,000 is 30.4%.
Of course there’s an ETF for that. Meet the Roundhill S&P 500 Target 10,000 2030 ETF (XX), which debuted on Oct. 1. XX isn’t your grandfather’s leveraged ETF nor is it his options-based ETF, but to be fair this rookie fund isn’t an income-generating asset so the risks of covered call ETFs aren’t germane. As its name implies, XX is play on the S&P 500 reaching 10,000 with a “Defined Target Date of January 10, 2030,” according to the issuer.
Roundhill comes right out and says that that actively managed XX “only pays off if the S&P 500 finishes above 10,000 on the target date.” So this is the bet prospective investors are making with this ETF: the S&P 500 will gain at least 30.4% from today through January 10, 2030.
Taking those first two trading weeks of 2030 out of the equation, the S&P 500 has 39 months to tack on another 30.4%. Obviously, there are no guarantees in investing, but getting is theoretically possible, if not probably, because the S&P 500’s average annual return dating back to 1957 is 10%.
Not a Leveraged ETF
Yes, XX holds options to accomplish its stated objective. And yes, derivatives are the foundation of leveraged ETFs, including those attempting to amplify the S&P 500 returns. However, these products are not the same.
A standard geared ETF attempting to deliver say 200% of the daily returns of the S&P 500 is usually good at accomplishing that objective for a day or a few days. Maybe even a few weeks, but due to daily resetting, the longer a leveraged ETF is held, the wider its performances deviate from the underlying index. Issuers of geared ETFs are overt in telling prospective traders as much.
For its part, XX doesn’t employ leverage in that fashion. That is to say an investor that buys the Roundhill ETF today will not be treated to a 2% gain if the S&P 500 rises by 1% tomorrow.
“XX can be confused with a leveraged ETF, but we believe they are not the same. A typical leveraged fund resets its exposure every day, which makes it a tool for short holding periods,” notes Roundhill. “Over longer stretches, and especially in choppy markets, that repeated resetting can pull returns away from the market's actual move. XX does not carry a daily reset. It uses long dated options tied to one fixed date, January 10, 2030. The outcome is influenced by where the S&P 500 finishes relative to 10,000 on that date. It is built to be held with a multi-year view toward that target.”
With XX, the Plumbing Is Essential
To its credit, Roundhill notes XX isn’t for everyone because an “investment in the Fund is highly speculative and is suitable only for investors that are able to risk a complete loss of investment.”
The reason an investor can lose everything they allocate to this ETF is simple: if the S&P 500 doesn’t reach 10,000 by Jan. 10, 2030, the options the fund holds expire worthless. That’s simply how theta, or time decay, works in the options market.
To be sure, XX democratizes access to a strategy the smart money has long used, indicating the ETF may be appealing to experienced, tactical, risk-aware market participants.
“It is a trade that sophisticated options desks and institutional investors have used for years to make leveraged, high conviction bets with calculated risk,” concludes Roundhill. “Structuring these trades requires the use of FLEX (Flexible Exchange Options) options, managing expiration dates, and sizing positions, work most investors don’t have time or tools for.”
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