The most common use of leveraged exchange traded products (ETPs), by both private and institutional investors, is for daily trading. This is unsurprising, especially for the retail investors that operate with less capital, as they consider leverage a means to boost their bet. The leverage, nevertheless, plays a fundamental role in managing a targeted exposure to a certain underlying security. Fund and portfolio managers can obtain the desired exposure and better allocate their resources as a result of leverage. For this reason, the use of derivatives and leveraged products is frequently longer than a trading day. Leverage Shares ETPs have some key features that can be flawlessly amenable to the desired management of a portfolio over time.
Unlike other products that are based on derivatives, Leverage Shares ETPs are physically backed by the purchasing of the underlying shares and they are easily tradable via listings on the LSE and Cboe Europe. Moreover, we have to accentuate their feature of being based on individual shares of popular companies, which are omnipresent in almost every benchmark and portfolio – a helpful tool for tactical and satellite strategies.
When we mention Google, Microsoft, Apple, Goldman Sachs, and the likes, we are naming companies to which many of us, in our portfolio directly or within an ETF / mutual fund, have exposure. The same applies to institutional investors, particularly when they must track an equity index, or they are rated for the excess return over a benchmark. Trading on those blue chips is clear since the volumes in their order books are extremely high and the speculation is always an extra weapon for the liquidity. However, from a strategic viewpoint, it is also not farfetched to have a buy-and-hold strategy on those dominant companies, as long as they reveal a solid and growing business, backed by robust future plans.
Volatility makes price fluctuations appear like a lottery in the eyes of a novice investor, but a company has a fair value which is continuously assessed. Basically, an enterprise value depends on the invested capital plus the present value of future free cash flow to the firm. It is precisely the tricky estimation of the future economic value added, combined with current events and the human emotions that result in market volatility. The outcome of the large swings is that some traders find an ace in the hole and natural selection stops out the beginners trying to beat the market. Hence, volatility is the pain that investors must deal with in order to realize their expectations over time. There is no such thing as a free lunch!
The management of a portfolio is fundamentally based on asset allocation, stock picking, and short-term tactical strategies. It goes without saying that an investor needs to discover a pool of companies with strong growth figures and a positive outlook, then implement a buy-and-hold strategy. In this article, for empirical purposes, we allude to Amazon (AMZN) stock and Leverage Shares 2x Amazon ETP (AMZ2
) to exhibit how long leveraged ETPs may complement a strategical position on a share.