3 Reasons to Buy BULZ, and 4 Reasons Not To

The MicroSectors Solactive FANG Innovation 3x Leveraged ETN is a great way to pump up the performance of the market's most and best-performing stocks

And, do you want market-beating returns

You typically need the former to get the latter, of course, since a greater reward requires taking on greater risk

And, you must also take the right risks

Ones that pay off rather than chew up your capital

Fortunately, just applying a little common sense and being patient will go a long way in this regard

With that as the backdrop, investors looking to spice up their overall returns without making their portfolio more complicated might want to take a look at the MicroSectors Solactive FANG Innovation 3x Leveraged ETN (BULZ 3

This exchange-traded note (ETN) is not for everyone -- but it may well be a good fit for you

Image source: Getty Images

What's the MicroSectors Solactive FANG Innovation 3x Leveraged ETN

There's a good chance you've never heard of it; plenty of investors haven't

Don't dismiss the spect simply because it's not drawing a huge crowd, however

That doesn't mean it doesn't have a potential place in your portfolio

Cutting straight to the chase, just as the name suggests, the MicroSectors Solactive FANG Innovation 3x Leveraged ETN is an exchange-traded instrument that on any given day moves three times as much as the so-called FANG stocks Amazon, Alphabet, Meta Platforms, and others collectively do

It's not just the original FANG names, however

The Solactive FANG Innovation Index that it is meant to mirror also includes the FANG companies' most important nology peers, such as Nvidia, Palantir nologies, and Broadcom

All told, the index and fund reflect the daily collective performance of 15 of the market's hottest stocks of its most important companies of late, multiplied by a factor of three

These are mostly names, of course, operating within high-demand industries artificial intelligence (AI), mobile devices, and cloud computing, just to name a few

One key difference between BULZ and leveraged ETFs

It's not weighted by its constituent companies' market capitalizations

It's an equal-weighted investment, meaning each constituent's contribution to the ETN's net daily movement isn't crimped or augmented just by that company's smaller or bigger size

This is arguably a healthier balance

And if you're wondering, an ETN is an exchange-traded note

They trade just ETFs, and for all practical purposes, can be seen as the same

The big difference is that an ETN doesn't nically hold the stocks in question

The ETN's issuer does, while its manager makes any buying and selling decisions

In this instance, the Bank of Montreal holds the underlying assets that are managed by a third-party asset manager called REX s

It's a broadly compelling spect

However, there are three very specific reasons to own a piece of this exchange-traded note

Data by YCharts. 1 to buy: An easy way to invest in all the market's most mising growth stocks One of the chief complaints the recent market environment is that only a handful of stocks have duced most of the marketwide gains

The MicroSectors Solactive FANG Innovation 3x Leveraged ETN is one of the few ways to own most all the best names without owning too many underperformers. 2 to buy: It's also an easy way to duce market-beating growth That being said, if an investor is specifically looking for stocks Nvidia, Palantir, and Amazon, it's a reasonably safe bet that they're also looking for above-average performance

BULZ offers even more of this performance than they could ever achieve simply by buying and holding these tickers alone

REX uses derivatives to amplify the daily moves these stocks are making, by a factor of three

If these tickers are on the rise, BULZ is rising much, much more. 3 to buy: BULZ is a regularly balanced equal-weight fund Finally, another one of the top complaints recent market dynamics is how a small handful of high-performing stocks Apple and Nvidia have caused indexes (and therefore, index funds) to become top-heavy

That just means the market's very biggest companies are now overrepresented

Should these individual mega-stocks start to peel back from their big gains, funds and indexes could take an exaggerated hit

The MicroSectors Solactive FANG Innovation 3x Leveraged ETN is reasonably well-tected from such an exaggerated setback, though

The underlying Solactive FANG Innovation Index is rebalanced to an equal weighting every month, curbing much of the potential for excessive volatility

That being said, there are even more downsides to consider before stepping into this particular leveraged fund

Data by YCharts. 1 to avoid: Its volatility could be outright sickening Volatility is fine as long as it's working in your favor

Things dramatically change, however, when the market's darlings start to lose ground, and you're watching your positions lose value three times as quickly

This of loss can create a panic, and investors don't always make the best decisions under duress. 2 to avoid: The underlying premise of the ETN could eventually fail The idea behind a FANG-focused fund that also includes most of the market's other hottest stocks makes sense right now because it's working -- these are the market's must-have names

But nothing lasts forever

There may come a time when these stocks aren't leading the marketwide bullish charge

While REX can swap the ETN's current holdings with more relevant and innovative names in the future, there's no assurance it will do so to your satisfaction. 3 to avoid: BULZ isn't cheap to own Although it's a pittance compared to its potential upside, by index fund standards, the MicroSectors Solactive FANG Innovation 3x Leveraged ETN costs more than average to operate

Its expense ratio is in the ballpark of 1% of its assets, shaving down your annual net gains by that amount. 4 to avoid: Even the Bank of Montreal says it's not a great "buy and hold" investment Given that it's the issuer and arguably has the most to gain by attracting new investors, you'd expect the Bank of Montreal to be the ETN's biggest cheerleader

In its own spectus on BULZ, the bank warns that its exchange-traded notes are "not int to be 'buy and hold' investments. " It explains, "If you invest in the notes, you should continuously monitor your holding of the notes and make investment decisions at least on each Index day, or even intraday. " In a similar time frame-minded sense, know that this particular ETN has a planned expiration date of June 28, 2041, but Bank of Montreal could also choose to shut it down anytime between now and then

Weighing the risk against the reward The downside certainly seems to outweigh the upside

And for most investors, there arguably is too much risk here to justify what's admittedly an impressive degree of potential reward

If you can read the spectus's warning for what it actually ly is, though -- boilerplate language meant to discourage inexperienced investors from becoming a legal liability -- there's a limited-use case to be made here

Although the Bank of Montreal appears to be discouraging long-term investors while encouraging short-term-minded ones, short-term trading is already difficult to do well; this ETN could make it even trickier

True buy-and-hold investors willing to stick with these 15 stocks for years on end, despite how they perform in the meantime, conversely, would be even more rewarded for their patience with a position in BULZ

Even these committed investors will want to keep any position in the MicroSectors Solactive FANG Innovation 3x Leveraged ETN relatively modest, as a means of limiting their risk

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors

James Brumley has positions in Alphabet

The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Nvidia, and Palantir nologies

The Motley Fool recommends Broadcom

The Motley Fool has a disclosure policy.