A new ETF is a long-term leveraged bet on the popular stock index

It's becoming harder to draw the line between investing and gambling.

Wall Street has continued to blur the lines between investing and gambling with one recently launched exchange-traded fund.

Earlier this month, Roundhill Investments launched the Roundhill S&P 500 Target 10,000 2030 ETF XX. The ETF essentially offers investors the chance to take a long-term leveraged bet that the S&P 500 SPX will continue to climb.

Options contracts held by the fund may deliver a substantial payout if the S&P 500 is trading above 10,000 on Jan. 10, 2030, when the contracts expire.

If the index falls short, then the contracts will expire worthless. Although the outcome for the options is binary, investors don't necessarily need to hold the fund until the contracts expire.

ETFs that use derivatives like options to offer investors leveraged exposure to a given index, stock or asset have proliferated in recent years. But, as Roundhill CEO Dave Mazza pointed out, most of these products have catered to day traders, by employing leverage that resets daily.

Unlike the hundreds of leveraged and inverse ETFs that came before it, the new Roundhill ETF is designed as a long-term leveraged play on the direction of the S&P 500.

With the S&P 500 notching a new record high earlier this week after three straight years of double-digit gains, a target of just above 10,000 probably appears within reach to many. Achieving the target would require a compound annual growth rate of about 8%, according to MarketWatch calculations.

That's slightly higher than the long-term average: Going back to 1928, the S&P 500 has delivered a compounded price return of 6.4%, excluding dividends, Dow Jones Market Data showed.

Like prediction markets, the fund offers investors the chance to take a "binary bet" on a predetermined outcome, said Dave Nadig, president and director of research at ETF.com, in an interview. That's where the gambling aspect comes into play, he noted. But because the leverage is long term and the product is packaged in an ETF, it might seem less risky to potential buyers.

"It's a bizarre way to think about the markets. It's gamification," Nadig said.

How it works

Instead of using binary prediction-market contracts, the ETF will invest in leaps, or long-term equity anticipation securities. These are long-dated options contracts - a kind of long-term portfolio insurance that can also be used to speculate.

Shares of the Roundhill ETF should rise and fall based on the value of the option contracts that it holds. These contracts are linked to an ETF that tracks the S&P 500. As the S&P 500 rises toward 10,000, the value of these contracts will likely increase, along with their likelihood of delivering a payoff.

At the same time, the contracts will lose some of their value as time passes and their expiration dates approach. For longer-dated options, the process of time decay happens slowly. Time to expiration and the volatility of the underlying stock index are dynamics that will drive price action in the ETF.

As for how much investors should expect the ETF to move from day to day, Drew Pettit, CIO at Roundhill Investments, said the contracts currently leave the ETF with 5.5 times embedded leverage to the S&P 500.

The fund's early performance offers a more concrete picture. On Oct. 2, when the S&P 500 rose 0.7%, the ETF rose 7.4%. When the index fell by 0.5% on Thursday, the ETF fell 4.9%, FactSet data showed.

To reach 10,000, the S&P 500 would have to climb almost 29% from Thursday's closing level. Whether it gets there or not, the ride will likely be a bumpy one.

"This is a volatile investment," said Roundhill's Mazza. "For someone who is just looking for long-term equity-market returns, this strategy is not for them."

Akin to gambling

Leveraged ETFs are generally risky and take big swings. Still, they have exploded in number over the past couple years. Meanwhile, a growing number of more speculative products have helped to inspire a flurry of new ETF launches.

"From a cultural and marketing standpoint," much of the ETF industry's product development over the last year has been "highly speculative" or akin to gambling, Nadig said.

"People are actually trying to wedge gambling into every corner of the financial market right now," he said. "I'm very, very against using the financial markets to create binary speculative bets."

The value of an option is not just a function of its time to expiration, but also factors in the volatility of the underlying product and how close it is to the strike price, said Steve Sosnick, chief strategist at Interactive Brokers.

"The trick to options trading is, did the underlying move happen quickly enough to defeat your decay," Sosnick said.

During the years before the contracts it is holding expire, the Roundhill ETF's structure and volatility profile will likely attract day traders looking to make short-term bets on the S&P 500.

Investors also have the option of buying the long-dated options contracts themselves - but that would involve paying up-front premiums to buy the contracts, which could carry wide spreads, and ETFs offer a potentially more palatable vehicle. The long-term nature of the leverage will also spare traders from the intense volatility decay experienced from holding leveraged ETFs that see big price swings and that reset daily.

Michael DeStefano contributed.

-Christine Idzelis