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These risky new ETFs can quadruple your gains — or losses

The concept of putting up a little bit of money for a lot of return is an investor's dream. But a new plan that regulators approved Tuesday is generating fears that the dream could become a nightmare.

ForceShares has introduced two new exchange-traded funds that deliver four times the returns, either higher or lower, of S&P 500 futures. The ForceShares Daily 4X US Market Futures
Long Fund and ForceShares Daily 4X US Market Futures Short Fund are designed to return 400 percent of the performance of the index.

While such "leveraged" ETFs are hardly new — a plethora of products offer double or triple up or down movements in various parts of the market — this marks the first time a quadruple fund has been launched.

Some market participants worry that the temptation of such outsized returns will be impossible to resist, with dire results possible.

"This is an innovation for people who are going to run the game, sit behind the table and deal the cards, and it's going to be a really bad innovation for those who think they can buy it and juice up some of their returns," said Sal Arnuk, a principal at Themis Trading. "This is market crack, and it concerns me."

Themis officials have been warning about the products for months. In addition to the dangers of causing owners to lose money rapidly, Arnuk worries about the administration of the funds themselves.

Why have the SEC?

In a blog post back in January, Arnuk questioned multiple aspects of the application to the Securities and Exchange Commission, primarily on whether the relatively unknown ForceShares was capable of running the two ETFs.

ForceShares officials could not be reached for comment.

The SEC approved a rule change that would allow the funds to be traded. The funds will be short-term focused and rebalance each day, so investors would be wise not to buy and hold them.

Arnuk said he understands the Trump administration's moves to loosen regulations, but believes the SEC made a mistake in this case.

"I can't imagine how they would read those disclosures and be OK with the product even if they were OK with the philosophy of giving crack," he said.

"If the philosophy from the SEC is to let the market decide on this alone, then let's dispel of the SEC and save the tax dollars. But let's not have the SEC, pay for them, have them state what their mission is, and abandon it," Arnuk added.

Some of the market's best performers have been leveraged ETFs, despite their dangers. Over the past year, for instance, the Direxion Daily Semiconductor Bull 3x Shares, which pays triple the return of the semiconductor sector, is up 245 percent.

However, Arnuk believes the primary beneficiaries of these kinds of funds are high-speed traders, who crave the kind of volatility that leveraged products offer. He believes it's not unreasonable to imagine funds in the future that offer five or 10 times leverage or more.

Watch: ETF flows still off to the races