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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.
Leverage Shares’ single-stock ETPs track indices by iSTOXX and NYSE in order to define their value in a transparent manner. Single-stock indices – especially those that are leveraged and inverse – produce daily returns. The daily returns aspect, in turn, influences the daily rebalancing feature of our products.
Rebalancing: The Why and How
Both leveraged and inverse indices use the end-of-day price of the underlying stock to define the closing level of the index. The fund represented by the ETP, in return, attempts to mimic this level to define the number of shares to buy or shares to sell short as closely as possible.
For instance, consider two hypothetical funds: a 2x long ETP and a -1x short ETP with the same underlying stock, in two scenarios:
For the 2x long ETP, here’s how the events of the day would impact the levels and exposure of the ETP at the end of the day (EOD) and the corrective actions required:
| – | EOD Level | EOD Exposure | EOD Leverage (No Rebalance) | Delta To Restore Leverage |
|---|---|---|---|---|
| Up 5% | $110 | $210 | 1.91 | +$10 |
| Down 5% | $90 | $190 | 2.11 | -$10 |
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
Similarly, for the -1x short ETP, here’s how the events of the day would impact the exposure of the ETP and the corrective actions required:
| – | EOD Level | EOD Exposure | EOD Leverage (No Rebalance) | Delta To Restore Leverage |
|---|---|---|---|---|
| Up 5% | $95 | -$105 | -1.11 | +$10 |
| Down 5% | $105 | -$95 | -0.9 | -$10 |
Note: The exposure is denoted as negative because these are short positions held by the fund. Therefore, in the case of the underlying going up by 5%, the portfolio manager will be reducing the short exposure by $10 (which, because it’s a short position, is represented as a positive value).
Thus, the daily rebalancing of the ETP is a necessary function to consistently offer the leverage and inverse positions promised to the holder of these products. However, this also brings into effect a “daily compounding” effect that can confound some investors. Let’s dig in to clarify some misconceptions.
Daily Compounding: Often Counter-Intuitive
Let’s consider two cases to highlight how daily compounding is a factor to be reckoned with:
Scenario 1: Upward Trending Market
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2x Expectation, (No Daily Compounding) | $100.00 | $110.00 | $120.50 | $131.53 | $143.10 | $155.26 | $168.02 | $181.42 | $195.49 | $210.27 | $225.78 | +126% |
| 2x Leveraged ETP | $100.00 | $110.00 | $121.00 | $133.10 | $146.41 | $161.05 | $177.16 | $194.87 | $214.36 | $235.79 | $259.37 | +159% |
| Underlying | $100.00 | $105.00 | $110.25 | $115.76 | $121.55 | $127.63 | $134.01 | $140.71 | $147.75 | $155.13 | $162.89 | +63% |
It can be seen that the daily compounding formula adds nearly 33% in gains over a 10-day period when compared to the expectations of a 2x investment without any adjustment for the factor restoration.
Similarly, in the case of the -1x short ETP:
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying | $100.00 | $105.00 | $110.25 | $115.76 | $121.55 | $127.63 | $134.01 | $140.71 | $147.75 | $155.13 | $162.89 | +63% |
| -1x Expectation, (No Daily Compounding) | $100.00 | $95.00 | $89.75 | $84.24 | $78.45 | $72.37 | $65.99 | $59.29 | $52.25 | $44.87 | $37.11 | -63% |
| -1x Leveraged ETP | $100.00 | $95.00 | $90.25 | $85.74 | $81.45 | $77.38 | $73.51 | $69.83 | $66.34 | $63.02 | $59.87 | -41% |
It can be seen that the daily compounding formula prevents a loss of nearly 23% over a 10-day period when compared to the expectations of a -1x investment without any adjustment for the factor restoration.
Scenario 2: Choppy Market
Consider a scenario where a rise of 5% in a single day is followed by a drop of 5% in the next. These kinds of “oscillations around the mean” would impact the 2x ETP’s performance as thus:
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying | $100.00 | $105.00 | $99.75 | $104.74 | $99.50 | $104.48 | $99.25 | $104.48 | $99.25 | $103.95 | $98.76 | -1% |
| 2x Expectation, (No Daily Compounding) | $100.00 | $110.00 | $99.50 | $109.48 | $99.00 | $108.95 | $98.50 | $108.43 | $98.01 | $107.91 | $97.51 | -2% |
| 2x Leveraged ETP | $100.00 | $110.00 | $99.00 | $108.90 | $98.01 | $107.81 | $97.03 | $106.73 | $96.06 | $105.67 | $95.10 | -5% |
It can be seen that an expected shortfall of 2% was magnified to more than twice that amount because of the daily compounding formula.
In the case of the -1x ETP:
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying | $100.00 | $105.00 | $99.75 | $104.74 | $99.50 | $104.48 | $99.25 | $104.21 | $99.00 | $103.95 | $98.76 | -1% |
| -1x Expectation, (No Daily Compounding) | $100.00 | $95.00 | $100.25 | $95.26 | $100.50 | $95.52 | $100.75 | $95.79 | $101.00 | $96.05 | $101.24 | +1% |
| -1x Leveraged ETP | $100.00 | $95.00 | $99.75 | $94.76 | $99.50 | $94.53 | $99.25 | $94.29 | $99.00 | $94.05 | $98.76 | -1% |
It can be seen that the loss in the underlying is identical to the loss in the ETP. Meanwhile, not performing the factor restoration would have provided a gain of 1%.
Scenario 3: Oscillations Around a Trending Mean
It is possible, in some instances, that the performance of the product with daily rebalancing is nearly identical to when there is none. For instance, consider the 2x long ETP in a scenario where the underlying falls by 1.9% in a day followed by a rise of nearly 4% in the next. The 10-day performance would be:
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying | $100.00 | $98.10 | $102.06 | $100.12 | $104.16 | $102.18 | $106.30 | $104.28 | $108.49 | $106.43 | $110.73 | +11% |
| 2x Expectation, (No Daily Compounding) | $100.00 | $96.19 | $104.12 | $100.23 | $108.32 | $104.35 | $112.61 | $108.56 | $116.98 | $112.85 | $121.45 | +21% |
| 2x Leveraged ETP | $100.00 | $96.19 | $103.96 | $100.00 | $108.08 | $103.97 | $112.37 | $108.09 | $116.82 | $112.37 | $121.45 | +21% |
It can be seen that the gains from the ETP mirror that of a leveraged investment without any daily rebalancing.
Now, consider the -1x short ETP in a scenario where the underlying falls by 4.96% in a day followed by a rise of 2.48% in the next. If this happened consistently over 10 days, the 10-day performance would be:
| – | – | Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9 | Day 10 | Result |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Underlying | $100.00 | $95.04 | $97.39/td> | $92.56 | $94.86 | $90.15 | $92.39 | $87.80 | $89.98 | $85.51 | $87.64 | -12% |
| -1x Expectation, (No Daily Compounding) | $100.00 | $104.96 | $102.61 | $107.44 | $105.14 | $109.85 | $107.61 | $112.20 | $110.02 | $114.49 | $112.36 | +12% |
| -1x Short ETP | $100.00 | $104.96 | $102.36 | $107.44 | $104.77 | $109.97 | $107.24 | $112.57 | $109.77 | $115.22 | $112.36 | +12% |
In this case, it can be seen that the ETP’s performance mirrors that of simply shorting a stock.
Note: Readers should keep in mind the scenarios modelled didn’t take into account any fees or commissions.
In ConclusionThe central takeaway from this demonstration is that investing in S&L ETPs, as opposed to other means of trading with leverage or going short, has both its pros and cons. Investing in our products come with a fair bit of market risk – since these are concentrated investments in individual stocks. Needless to say, a savvy investor performing the right level of due diligence with active portfolio management practices and a keen perception of market sentiment has the potential to capitalise on market trends.
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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This is a marketing communication. Please refer to the Prospectus of the ETPs and to the KIID before making any final investment decisions.
This information originates from Investium Limited, which has been appointed as distributor of Leverage Shares products in Europe by Leverage Shares Management Company Limited (the “Arranger”). Investium Limited with registered address at 6 Nikou Georgiou Street, Office 302, 1095 Nicosia Cyprus, is a financial services provider regulated by the Cyprus Securities and Exchange Commission (CySEC).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. Investium Limited and the Arranger (together referred as “Leverage Shares”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of Leverage Shares. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Leverage Shares.
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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.
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