10.05.2024 Upcoming Corporate Actions

Аватар на автора

Author

Date

Bet on Tech, Hedge the Volatility

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

Since the dot-com bubble at the turn of the century – or perhaps, despite it – American Tech has become increasingly dominant in the U.S. market. As manufacturing shifted away from American shores in droves, tech remained the dominant means of catalysing consumption and the American edge over the world. With 7-10 major components of any broad U.S. index being tech companies, it could be argued that no bet on the American economy via a broad index is incomplete without the consideration of tech companies.

However, this overwhelming dominance of tech brings with it substantial risks. With conviction increasingly centred on tech comes volatility due to inevitable overvaluation. Thus, while the likes of the tech-heavy Nasdaq-100 becomes an important consideration for asset managers – in the form of the Invesco QQQ Trust (QQQ) – the prospect of a cool-off in tech convictions dragging down this key index’s performance is ever-present. A strategy to hedge against this is very much in order.

One means of pursuing this would be via the iPath S&P 500 VIX Short-Term Futures ETN (VXX). This ETN (or “Exchange-Traded Note”) is linked to the daily price changes in Cboe Volatility Index, which is often referred to as the “market’s fear gauge” as it tends to rise during periods of market uncertainty and spike in times of panic. A real-time index that indicates the expected level of price fluctuation in the S&P 500 Index options over the next 12 months, the VIX encapsulates expectations of future volatility (or “implied volatility”). In general, uncertainty tends to spikes the prices of the S&P 500 Index option while the lack of uncertainty cools them.

VXX tracks the S&P 500 VIX Short-Term Futures Total Return Index, which offers exposure to long positions in Cboe Volatility Index futures contracts. Therefore, the VXX essentially becomes a bundle of futures contract on market volatility. Now, longer-dated futures contracts tend to be higher levels than shorter-dated ones, the VXX continually sells the futures contracts closest to expiration to buy the next dated contracts in a “rolling” process.

In essence, the VXX forms an important source of information on the “directionality” of the “broader” market S&P 500. Over the past full 12 calendar months, the overall month-wise trajectory has been oppositional between the two more often than not.

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

In the event when both VXX and the “broader” market have been synchronized in month-wise fall, the VXX has led the market.

Under the macroeconomic framework broadly understood, it could be reasoned that when the “broader” market rises, the “tech-heavy” market tends to rise a little higher. This tends to hold true in the other direction when the “broader” market falls. In the same period of consideration, all three of these instruments have shown behaviour that largely falls along these expected lines.

Thus, using a short (or “inverse”) exposure VXX as a “hedge” against the QQQ has one of two effects on a QQQ investment in a bullish outlook:

  • When certainty firms up, the VXX falls while the tech-heavy market rises. Thus, the hedge is a boost.

  • When certainty falters, the VXX rises and the hedge pares off some gains made in the tech-heavy market.

On the other hand, when certainty firms up during a bearish environment, the VXX falls while the tech-heavy market falls. In this case, the hedge pares some of the losses in the market.

Of course, it’s possible that there will be high uncertainty and bearish pressure on the tech-heavy market. This would be a two-headed cost to the strategy’s performance.

Hence, it’s not a perfect 1:1 hedge and active management is needed. This is now easily accessible to sophisticated investors by virtue of the recently launched “LS Short Volatility Long Tech ETP” (LSE: SVLT; ISIN: XS2595675641). This ETP (or “Exchange-Traded Product”) pairs QQQ with VXX via a proprietary methodology wherein the portfolio is rebalanced on a quarterly basis such that the short exposure to volatility will generally be in the 15% range relative to a long exposure to QQQ of 100%. The portfolio manager maintains discretionary powers to modify the short exposure in response to changing market outlook.

In the backtested period going back one year relative to the 23rdf of June this year, SVLT has delivered a return of over 46% while the S&P 500 and Nasdaq-100 have been a little over 17% and 12% respectively.

Upon a decline in conviction in the broad market, two effects can be assumed will take place:

  1. There will be a “crowding” effect into tech stocks since they’re being deemed more survivable than most of the other “non-tech” companies. This will likely push up tech valuations while market volatility continues to plummet. This will not be a sustained movement; eventually tech stocks will have to follow the rest of the market.

  2. There will be an “inflection point” when the drop in stock valuation will no longer be countered by the rise in the hedged position in volatility. Volatility will have plateaued at this point. At this moment, holding the ETP would have a best-case scenario of being equivalent to holding the tech-heavy ETF itself. After this is the “grey zone”: market movement from this point onwards will determine which is the better choice.

Until then, holding the instrument is likely to have some tangible potential. This type of ETP – unlike “fixed-factor” ETPs – offers sophisticated investors access to a strategy that draws on the portfolio manager’s experience and alacrity at an affordable price point. In this case, it’s a strategy that effectively gives exposure to a tech-heavy market – via the QQQ ETF – while tempering/enhancing performance through a calculated and dynamic “inverse” bet on volatility – made possible via the VXX ETN. Given that these are two different classes of instrument, the ETP thus paves the way towards effectively delivering a strategy in a price-friendly manner. In other words, sophisticated investors are bound to find SVLT to be a very effective yet balanced strategy to gaining exposure to the tech-heavy top of the line in the American equity market.

Investors interested in knowing more can.click here.

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

Share this:

Related Products:

Related Products:

Related Articles

Market conditions prime SVLT for outperformance against the Nasdaq-100
Market conditions prime SVLT for outperformance against the Nasdaq-100
Market conditions prime SVLT for outperformance against the Nasdaq-100

Required Information

Upcoming Webinar

Technical Analysis Strategies for Successful Trading

by Violeta Todorova

22.05.2024
3.00 PM GTM+1

Welcome to Leverage Shares

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.