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Education Series: Single-Stock ETPs

Capitalizing on Negativity: Tech Stocks

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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
Private investors typically buy into the market when they perceive an upward trend in the market. However, there frequently arises a scenario wherein it is possible to make profits when the opposite is true. It is also possible to benefit when there is an adverse report about a company’s business practice is known or when there is a downward trend in the market.

Single-stock Short & Leveraged Exchange Traded Products (S&L ETPs) are practically purpose-built for such scenarios. A large number of these ETPs are built around some of the most heavily traded U.S. tech and finance stocks, which presently account for a quarter of the S&P 500 and nearly half of the Nasdaq 100.

Shorting on Adverse Reports

In early August, it was reported that Micron Technology Inc (MU) would not be supplying components to Huawei following a ban on Huawei phone sales in the United States. MU accounts for about 0.2% of the S&P 500 index (GSPC). While the index had largely recovered from the pandemic-induced downturn that began in mid-January by this time and was holding steady, MU suffered a fall on account of a loss of a crucial customer.

Being invested into a -1x MU ETP – which is equivalent to a -1x daily short position in the stock – on 11th of August (when the company lowered guidance) for a period of 10 trading days would have yielded a substantial benefit to the investor:
While being invested into GSPC would have yielded a 2% gain in this period, being invested into the -1x MU ETP would have yielded almost 9%.

Given that MU had fallen far behind the performance of its parent index due to an adverse report at a time when the parent index was doing well, an investor might think that the chances of betting against a stock when the market is in a downturn isn’t favorable. This isn’t always the case.

Shorting on Market Downturn

In the opening days of September, all major indices had a substantial drop in value, following concerns that long-term growth outlooks on leading companies were far too optimistic to be realistic. AMD, a champion outperformer of the market since the pandemic’s effects were seen worldwide and which comprises about 0.3% of GSPC, was no exception. However, relative to the downward trend in the market, AMD’s fall was slightly more pronounced.

Being invested into a -1x AMD ETP from the 2nd of September for a period of 14 trading days would have yielded a substantial benefit to the investor:
While being invested into GSPC would have yielded a 7% loss in this period, being invested into the -1x AMD ETP would have yielded a gain of almost 14%.

A point of commonality in both cases is the fact that there was a “trend” in the patterns seen, i.e. both MU and AMD largely had a downward trajectory throughout the period under examination. The daily compounding formula within the ETPs heavily rewards (or penalizes) this aspect.

Daily Compounding of ETPs: A Primer

The daily “reset” feature of the ETP brings into effect a daily compounding effect that can often deliver more in gains than the leverage factor would imply.

For instance, consider a 2x Leveraged ETP in an upward trending market scenario with a 5% rise every day. Starting from Day Zero with an investment of 100 Euros, the 10-day performance would be as thus:
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 in the underlying asset.

During days with choppy markets, oscillations around the mean would impact the product’s performance. Assuming a rise of 5% in a single day followed by a drop of 5% in the next would result in a 10-day performance as thus:
It can be seen that an expected shortfall of 2% was magnified to more than twice that amount because of the daily compounding formula.

However, another form of choppy market behavior is oscillation around a trending mean. In such a scenario, the product’s performance would converge close to the expectation of a 2x investment in the underlying asset. For instance, assuming a fall of 1.9% in a single day followed by a rise of 4% in the next would result in a 10-day performance as thus:
In this case, it can be seen that the product’s performance mirrors that of a 2x investment in the underlying effect.

From these illustrations, it can be summarized that when it comes to leveraged ETPs, “the trend is your friend”.

It is important to note that the scenarios depicted here show a trend extending over several days. However, in practice, it is not unusual to see a trend that lasts only a day or two. It is also possible to earn gains with this if an investor is tapped into market news and company reports. Thus, an investor with a keen eye on the market would be well-positioned to maximize gains whenever an outperformer is apparent for any period of time. In the event that this outperformance is seen in a stock with a downward trajectory, investing into -1x ETPs is a safer and cheaper means of making gains in tumultuous times.

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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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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