Short and Leveraged (S&L) ETPs are complex financial instruments which track the performance of an underlying asset, such as a single stock or commodity. They are designed to multiply the daily performance of the underlying tracked.
This means that their profit or loss each day is determined by how much the underlying asset has risen or fallen that day. S&L ETPs, as their name suggests, seek to deliver 2, 3 or even 5 times the daily performance of a given benchmark.
In pursuit of their daily investment objectives, S&L ETPs must rebalance their assets daily to offer the same leveraged or inverse exposure on the next day. This means that their returns over time are the product of a series of daily returns, and not the leveraged factor multiplied by the cumulative return of the underlying asset for periods greater than a day.
The daily ‘reset’ occurs at the end of each trading day (market close). As a result, S&L ETPs are an effective alternative to be traded on an intra-day basis. While they can be traded for longer periods, investors should bear in mind that gains and losses will be compounded over time. We explore this in more detail in part 4. dedicated to Compounding.
The S&L ETPs performance is calculated by multiplying the daily performance of the underlying asset by the leverage factor, less costs, and fees.
The daily performance is the change in price between the market close on one trading day and the market close on the next trading day. For instance, if the closing price is $100 on day 1 and on day 2 the closing price is $101, the daily performance of a 5x ETP is +5% because the price of the underlying has risen 1%.
Education
