- Instruments
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It’s obviously difficult to know which company within a particular sector or theme is going to be the champion performer over time. When in doubt, an investor can always build a “basket” of single-stock ETPs around a theme in order to get non-diluted exposure for a particular trading strategy.
In this article, we’ll take a quick look into the ideas of “baskets” and present a number of moments when baskets built with Leverage Shares ETPs have shown strong performance.
Basics of Basket-Building
A “basket’ is simply a collection of instruments that are traded simultaneously. The concept is familiar for investors who have previously invested in ETFs, which often provide exposure to a broad basket of stocks. Creating more targeted exposure via smaller baskets allows investors to choose their own investments rather than investing in (too) many products, some of which may not not necessarily ‘belong’. It’s a particularly important tool for institutional investors and investment funds looking to hold multiple securities in certain proportions since simultaneous trades hold in place the portfolio allocation for each security.
It’s not particularly difficult for investors to conceive and build a basket: all that’s needed are a few building blocks to crystallize an idea.
The “first block” would be the type of security. In the examples we present here, the securities we use will be our 3X long ETPs available for sophisticated investors.
The “second block” would be the rebalancing frequency, i.e. how often would the ETPs be held before being rebalanced to the target exposure (equal weighted, market cap weighted, custom weighted, etc.)? In the examples we present here, since the standard recommendation is that leveraged instruments shouldn’t be held for more than a day, we shall set the basket rebalancing frequency at “daily”.
The “third block” would be the invested amount. In the examples we present here, we make an initial investment of $10,000 and then use the proceeds to finance subsequent rebalancing.
The “fourth block” is the allocation rule, i.e. in what proportion are the 3X ETPs to be held? In the examples we present, the allocation rule would be equally-weighted. The closing price of the day would determine the weight of each ETP held.
The “final block” would be the basket’s theme. This is the central idea behind the investor holding the ETPs in question. Each of the examples we present will be based on a different idea previously presented in Leverage Shares’ “Market Insight” section over the past few weeks.
Throughout this article, two benchmarks will be used: the tech-heavy Nasdaq-100 (NDX) and the broad-based S&P 500 (SPX). The holding period for each basket will be a minimum of one calendar month.
Exploring Themes
The first theme we’ll outline is the “Gig Economy” which – as highlighted in an earlier article – feature heavy-hitters Airbnb and Uber. As the global economy recovered from the pandemic in Q1 2021 and lockdowns eased, it would be a fair assumption that these two stocks might do well.
In the calendar month of February 2021, the basket of 3X Airbnb (ABN3) and Uber (UBR3) ETPs reached a performance of over 60% before closing out the month with a net 12% in gains. The benchmarks NDX and SPX were down 3% and up 0.9%, respectively.
The next theme will be “Streaming”, which is shaking up traditional broadcasting and cable services. As we discussed in our article on streaming companies, it might be premature to include Disney in this category yet. So this basket has the 3X Netflix (NFL3) and Roku (ROK3) ETPs.
The calendar month of June was particularly interesting here: the ARPU (Average Revenue Per Unit) numbers and estimates for Q2 2021 were released by the companies along with many industry experts and watchers making prognostications of what the financials as well as the ARPUs signified.
Over the calendar month of June 2021, after a period of uncertainty, the basket closed with over 57% in gains. The benchmarks NDX and SPX were up 6.6% and 2.2% respectively.
Seasoned investors will likely know that “FATANG” – Facebook, Apple, Tesla, Amazon, Netflix and Alphabet – are a popular basket of stocks that generates a lot of discussions among day traders, punters and financial media.
2020 was a trying year for these stocks. After the drop in February to the highs in subsequent months, Q3 2020 started out with a warning from many analysts that these stocks were outsized in their prices which led to another drop that quarter. However, these stocks persevered on the basis of strong earnings and other metrics.
In the calendar month of November 2020, the basket of 3X Facebook (FB3), Apple (AAP3), Amazon (AMZ3), Netflix (NFL3), Alphabet (GOO3) and Tesla (TSL3) ETPs yielded 24% in gains while the benchmarks NDX and SPX yielded 10.6% and 9.4% respectively. Continuing to “run” the basket till the end of December would have yielded 37% in gains while the benchmarks yielded 16.3% and 13.5% respectively.
Caveats and Conclusion
Hindsight is always 20/20 so a look back would yield many such opportunities for various “long” themes. However, a shrewd investor can modify the idea of baskets in many ways to yield opportunities even during market downturns.
For instance, if the “third block” were amended such that the invested amount remains capped at $10,000, i.e. regardless of the day’s performance, the investor were to top up the investment amount and remained invested, a “modified inverse” FATANG basket – -1X Facebook (FBS), Apple (APLS), Amazon (AMZS), Netflix (NFLS) and Alphabet (GOOS) and the -2X Tesla (TS2S) ETPs – would have yielded 17% in gains for the calendar month of February 2020 while the benchmarks were down 7% and 9% respectively. This might prove to be an effective way to short these stocks, or even simply hedge exposure to the likes of the Nasdaq-100.
Readers should notice that this “modified inverse” basket even amended the “first block” in another way: the same inverse factor was not used for all companies since there was an expectation that Tesla would be hardest hit on account of lockdowns, et al. This is an important distinction: it’s not necessary to pick only leveraged instruments. To complete a theme, an investor can add Leverage Shares’ range of 1X Stock Trackers and/or select combinations of 3X, 2X and -1X factors with different (or even the same) underlying companies to build out interesting strategies. In other words, the “final block” could determine what the first through fourth blocks need to be.
Also, while leveraged instruments are not usually held for more than a day, shrewd investors can weigh risks of being invested for more than a day and amend the “second block” to rebalance on a 2-day basis, a 5-day basis or more.
The “third block” represents a prickly challenge: being invested in larger amounts often yields more profit. With larger amounts, allocations among instruments to reach “whole numbers” relative to the price of the instruments improve. This can often lead to better performance.
For instance, we’ll try and replicate the MicroSectors “+3X Long FANG+ ETN” (ticker FNGU) which adds four companies to FATANG – Alibaba (BABA), Baidu (BIDU), NVIDIA (NVDA) and Twitter (TWTR) – weighs them equally and rebalances daily. This Exchange-Traded Note (ETN) is estimated to have close to $1.9 billion in assets under management (AUM).
Given that FNGU is not available for European retail investors, this instrument can be effectively be replicated by using the 3X ETPs on Facebook (FB3), Apple (AAP3), Amazon (AMZ3), Netflix (NFL3), Alphabet (GOO3), Alibaba (BAB3), Baidu (BID3), NVIDIA (NVD3), Tesla (TSL3) and Twitter (TWT3) for a slightly lower expense ratio. Note: Other costs, like the spread and brokerage commissions, have not been included.
Consider the month of January 2021 where these stocks continued to ride the highs from their closing days in 2020. It is a reasonable assumption to make that this basket would carry forward with solid gains. However, “third block” amounts yield different results for this basket.
Readers should note that “equally-weighted” in this case means the nearly same amounts are invested into purchasing each instrument and not the same number of instruments.
Let’s consider the $20,000 case and examine the initial (starting) portfolio held. FB3 and NFL3 are very close to each other in price and the same is true for BAB3 and TSL3. However, when the investment is being spread across a large number of instruments, the difference in number of ETPs purchased (Note: fractional investments are not being considered) is 13.3% and 4.8% respectively.
Also, since all instruments do not move in tandem with the same magnitude, performance contribution is not going to be the same. When scaling up to larger amounts, the relative price neighbour difference changes. This causes the variance in performance when scaling up or down the investment value.
At the $20,000,000 level, the basket closes the month ahead of FNGU’s gains by a paltry 1.2% which reduces to 0.8% if held till the first week of August.
This is an important lesson for investors in two ways:
Another important factor to consider is that an investor should consider the gains: being invested in FNGU or the $20 million basket yields around 32% versus 18% in benchmarks. Meanwhile, a number of opportunities crystallized using themes yielded much higher gains in a shorter period.
This highlights the value of making a tactical play. While it would certainly make sense to be invested in a large index fund or special ETN such as FNGU as part of an investor’s “core portfolio”, having funds ready to make tactical plays with Leverage Shares instruments in a “satellite portfolio” is a very strong value-building move. Using leveraged instruments such as the 3X ETPs also allows new tactical buyers to get magnified exposure and performance while they weigh the benefits of building “core” and “satellite” portfolios”.
Investors should review Leverage Shares’ full list of short & leveraged ETPs as well as trackers to build out their portfolios in a variety of sectors and themes. Also, investors should subscribe to the mailing list to stay abreast of new developments.
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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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
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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.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
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This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
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.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
