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Sandeep Rao

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Part 1: Introducing Our Single-Stock ETPs

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Our Short & Leveraged Single-Stock ETPs could be challenging for some investors looking for new innovative products to add to their portfolio. In this six-part educational series, we describe the idea behind our products, their construction, features and their benefits to investors as well as when compared to other similar-seeming products.

Contents
  1. How We Build Our Products
  2. Cost of Products
  3. Our Products vs CFDs
  4. Our Products vs Swap-based ETPs
  5. Tax Benefits
  6. In Conclusion

Sophisticated investors often employ leverage based on their conviction on market trends. This is usually based on views to magnify profits or hedge positions against market events. However, such sophistication comes with several risks and costs. Leverage Shares offers short and leveraged ETPs to make these strategies available via a single trade coupled with reduced risks and cost-efficiency.

How We Build Our Products

Our single-stock ETPs are based on leading U.S. stocks. Each index is tracked via a fund created using U.S. stocks. Leverage Shares invests the proceeds from the sale of the subscriptions to this fund with the margin account provider who purchases (or sells) the underlying stocks with the requisite leverage factor.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Cost of Products

For our leveraged products, (i.e. 2x/3x ETPs), the daily cost is calculated as the sum of:

  1. An annual management fee of 0.75% (charged daily, 360-day basis);
  2. The current U.S. Federal Funds Rate* plus 1% (charged daily, 360-day basis).

For our inverse products, (i.e. -1x ETPs), the daily cost is calculated as the sum of:

  1. An annual management fee of 0.75% (charged daily, 360-day basis);
  2. The current U.S. Federal Funds Rate minus 1% (charged daily, 360-day basis).

*The U.S. Federal Funds Rate is the target interest rate at which commercial banks borrow and lend their excess reserves to each other overnight.

Traditionally, shorting a stock, i.e. taking a position based on the expected downturn of a stock, typically involves a borrow rate. This rate is levied by the broker on the investor in order to fund the cost of “lending” the stock required to make this strategy. Broker costs vary widely across the spectrum, depending on the stock, the region in which the broker operates and sometimes the duration of the relationship the investor has with the broker. The Federal Funds rate also changes from time to time.

Assuming an annualized borrow rate of 1.5%, an effective Federal Funds rate of 0.25%, and an investment strategy involving 100 shares over a 15-day period, the schedule costs are as follows:

[ninja_tables id=”23230″]

For a leveraged strategy, the costs vary widely between brokers on account of the leverage factor adding to the complexity. Also, for these types of strategies, the investor needs to have a margin account with the broker. To acquire the benefits of these strategies by purchasing our products, the investor does not need a margin account.

Our Products vs CFDs

Contracts for Differences (CFDs) have been popular for well over a decade now. CFDs are essentially agreements between two parties regarding the price of a stock. For example, if the stock falls in price, the seller receives a payment from the buyer and vice versa. Since there is potential for significant price movements, the potential for losses is large – especially when trading with higher leverage factors. In addition, CFDs require a margin account which virtually guarantees that financing costs and commissions would be applied.

The usage of leverage factors in CFDs draws a parallel in the minds of some between these agreements and our products. However, these similarities are cosmetic; our ETPs come with transparent costs at every turn.

This is not the case with CFDs. Over the years, it has been estimated that anywhere between 66%-79%1 of retail investors lose money when trading CFDs. Some of the most-quoted risks for CFDs are:

  1. CFDs are contracts with clauses that an average investor might not fully comprehend, depending on their trading experience;
  2. CFD providers come with very high counterparty risk. Hence, if the broker goes under, investors might lose their capital invested;
  3. Some CFD providers fulfill their agreements by pooling an investors’ capital with that of others. This creates a “pool risk”, in that one investor’s failure to pay for a bad trade might impact other investors who weren’t in on that trade.
  4. Some CFDs built on specific price points encounter “gapping risk”. In the event that a stock price moves so quickly that it blows past the specified price point without having any volumes on said point, there could be a significant loss to the investor.

Our Products vs Swap-based ETPs

Most existing short and leveraged ETPs track the performance of the underlying index by investing in total return swaps with a counterparty. A total return swap is an agreement by one party (the “payer”) to make payments based on an agreed-upon rate while the other party (the “receiver”) makes payments based on the return of an underlying asset which, in this case, would be the index. The receiver is thus vulnerable to both market risk and credit risk. The credit risk also affects the payer since both parties are bound by this agreement.

It bears noting that while other ETPs look and sound similar to our products, the underlying total return swap agreement underpinning the other ETPs only creates a “synthetic” product since the ETP issuer does not physically hold the underlying assets on which the product is based. This is a key difference with respect to how Leverage Shares offers its products: all stocks that underlie our ETPs are physically purchased by Leverage Shares and ring-fenced to protect investors in case of bankruptcy. This significantly reduces the credit risk that an investor would otherwise be subject to.

Tax Benefits

Warning: Tax treatment depends on your individual circumstances and may be subject to change.

For UK residents, the Individual Savings Account (ISA) system has evolved into an alternative retirement investment tool, with the Self-Invested Personal Pension (SIPP). As of the end of the 2018-19 tax season, HMRC reports that 11.2 million ISA accounts hold assets with a market value of over £584 billion2 while the SIPP market was valued at £2.4bn in 2017 by GlobalData3 with the market expected to grow to £500bn by 20254.

Both ISA and SIPP are very efficient tax-efficient “wrappers”, which grants ISA and SIPP account holders with the potential to become an informed investor making attractive tax savings if they use approved market instruments. As per the current provisions laid out by HMRC, the account provider for these schemes would not be in favour of any instrument where the potential losses would exceed the assets held in the account.

Once again, please note: Tax treatment depends on your individual circumstances and may be subject to change.

Leverage Shares ETPs are both ISA and SIPP-eligible investments, by virtue of the fact that the loss is limited to the initial amount invested. It bears noting that swap-based ETPs are also eligible – but CFDs are not.

The feature that limits losses only to initial investment opens another interesting avenue to ISA and SIPP account holders. As per the aforementioned provisions, an account holder may not enter into a shorting strategy on any stock and have said investment be eligible for these “wrappers”. However, the inverse ETPs are both eligible for these “wrappers” as well as largely equivalent to a shorting strategy.

In Conclusion

Leverage Shares’ suite of physically-backed ETPs provides a stable and tax-efficient* system of strategy-building around the most heavily traded U.S. stocks. These products come with a very high level of transparency with respect to costs and a minimum amount of fuss.

* Tax treatment depends on your individual circumstances and may be subject to change.

A complete investor-specific summary of the benefits of using our products versus other styles of investing can be tabulated as thus: [ninja_tables id=”23197″] *Not for option seller

References:

  1. What are the risks of CFD Trading?, Charlie Barton, Finder, December 29, 2020
  2. Individual Savings Account (ISA) Statistics, HM Revenue & Customs, June 2020
  3. Sipp market set to grow by £1.9bn a year, Maria Espadinha, FT Adviser, July 10 2018
  4. Sipp industry predicted to grow to £500bn by 2025, Ruth Gillbe, FT Adviser, November 2 2016

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.

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This website is accessible to retail investors in the UK for informational purposes only. Leverage Shares does not directly distribute to retail investors. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice.

Information contained in this website is intended only to provide general and preliminary information and does not constitute any legal or investment advice, an offer to sell or solicitation to buy any security, including shares of any Exchange Traded Products (“ETPs”).

An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.

I acknowledge having my legal residence in the selected location.

Please confirm the Terms and Conditions by clicking on “I agree”.

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Information contained in this website is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. This information does not constitute an offer to sell or solicitation to buy any security, including shares of any Exchange Traded Products (“ETPs”).

An investment in the promoted ETPs may only be made based on the ETPs´ legal documentation and will be subject to terms and conditions contained therein.

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions. The ETPs shown on this website are not available for sale in the U.S. or to a U.S. person.

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