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
This instrument, traded on the German bourses, is quite typical of the Factor Certificates available in the marketplace. The fee structure indicated is also fairly typical, with some variation in percentages. As is evident, the fee structure is rather complex. Going by the composition, the holder initiating the investment is required to pay the issuer (i.e. Goldman Sachs) at least 4.40% of the resultant investment’s growth as fees over the course of a year. This amount doesn’t include any other fees from the wealth manager, brokerage, margin fees, etc. Converting on a daily basis, this constitutes a “payout” of at least 0.01% of the investment’s value each day. However, after factoring in the one-off costs, the effective cost impact on any given day for this product is around 5% of the product’s performance!
In contrast, the Leverage Shares -3X Short Tesla ETP (Deutsche Borse Ticker TS3S; ISIN: XS2337090265; more details here) pays the holder a fee of 10.48% over the course of one year, which translates to a fee of 0.03% on a daily basis. Hence, if it is assumed that the product does not make any gains/losses over the course of a year and interest rate conditions remain constant, an investor would make 10.48% simply from holding the product.
Note: In either case, the holder neither pays nor receives the cost/fee at any point of time. It is “baked” into the product, i.e. the final price seen on the trading screen already factors in the fee payable on a continuous basis. Thus, in the aforementioned scenario, even if the product doesn’t appreciate in its performance throughout the course of the year, its fee structure ensures that its price appreciates by 10.48%.
The reason why the ETP is so interestingly priced is a function of the formulation used for the computation of costs. The formulation is built around the Effective Fed Fund Rates (EFFR) which is quite high right now. Generally speaking: when the EFFR trends higher, the formulation structure by Leverage Shares ensure that the fees for the short ETPs trend lower. On the other hand, the Factor Certificates are financially-engineered products with a variety of scenarios modelled to protect the issuer’s liability and implied cost of capital.
A close counterpart to the Factor Certificates of Europe would be the Daily Leverage Certificates (DLCs) of Asia. Typically traded in the Singapore and Hong Kong bourses, these instruments find a lot of favour among the speculative market players of the region. For example, one such DLC would be the 5X Alibaba Short DLC (ISIN: LU2375049413) issued by Société Générale.
The stated fee structure ensures a cost of at least 0.15% is incumbent on the holder’s investment performance on a daily basis. On the other hand, the Leverage Shares 3X Alibaba Long ETP (Deutsche Borse Ticker 3BBE; ISIN: XS2337090851; more details here) effectively charges the holder a daily rate of a little under 0.03%.
As before, the disparity in fee levels is also based on the formulation of costs: the DLC is an intricate financially-engineered instrument while the ETP is built upon the Effective Fed Funds Rate prevalent at any time.
One more aspect that should be borne in mind with financially-engineered products such as Factor Certificates and DLCs is their time to expiry. Most Factor Certificates (and Daily Leveraged Certificates) are designed with a “Expiry Date”, i.e., on a certain day in the near future, these instrument would cease to exist and the holder will have to settle with the issuer at the DLC’s fair intrinsic value that is determined on its “Valuation Date”, which is usually one business day before the stated Expiry Date. After expiry, the holder can choose re-invest in another engineered product with the same underlying, if they wish to continue to bet on the underlying and if such an instrument is available at the time.
Technically, ETPs generally have no expiry date. Some jurisdictions necessarily require a date in which event a date is included (and subsequently extended). An ETP would generally be delisted only if the Net Asset Value approaches US$0. In such an event, the holder would receive the delisting price for their investment.
Another note: some jurisdictions also necessarily require ETPs to be termed as Exchange-Traded Notes (ETNs). This might be confusing to some investors. It’s always important to read the Key Information Document to know the general features. ETNs typically don’t have a single underlying security (such as, say, Tesla). This highlights why it’s important for investors new to this space to read the Key Information Document (KID) to understand what they’re buying into.
ETPs vs CFDs
Not every ticker is represented in the form of a Certificate (be it DLC or Factor Certificate) nor are Certificates available in every region. In either event, brokerages are known to step in with a type of arrangement known as “Contract for Differences” (or simply CFDs). For a certain class of investor, the brokerage would essentially structure a deal with specific costs that could widely from investor to investor.
Like Certificates, there is no single universal template for costs that brokerages follow. For example, eToro simply states the following schedule of fees:
A short position would attract an annual fee of 5.3% which, in conjunction with the “spread”, adds up to a charge of 0.16% on a daily basis. Of course, with increased leverage, comes increasing fees. As the examples with the Certificates indicate, this is at least 10 times greater than the packaged solution available as an ETP.
Also, another important point to note is that, unlike ETPs and Factor Certificates, a CFD’s leverage ratio is not rebalanced on a daily basis. Also, unlike ETPs and Factor Certificates, a CFD is not traded in the market. Instead, the counterparty is the brokerage itself.
A Quick Note on Custom Baskets
Now, be it Certificate or CFD, the underlying tickers on top of which these instruments/arrangements are built are typically either a single name or an index. It is, of course, possible to build an arrangement through a brokerage to construct a large number of CFDs with a custom solution but the fee schedule would end up being rather high. In a similar vein, transforming this into an engineered Certificate would bring with it a number of costs, dependent on scenario risks.
Hence, an ETP customized under a “White Label” arrangement would be the ideals means for an investment manager to build a “basket” of instruments to derive a scalable and tradable solution that could be distributed across a pool of investors. For instance, Leverage Shares offers a “White Label” service to investment managers. Two examples of successful “customized” ETPs with highly-rationalized costs under this service are the Kronos Strategy ETP (more details here) – which is a systematic strategy – and the Wahed FTSE USA Shariah ETP (more details here) – which is a customization of an index as per Shariah finance norms.
Key Takeaways
When it comes to complex products such as CFDs, Factor Certificates/Daily Leverage Certificates (DLCs) and ETPs, there are some key elements wherein ETPs prevail overall relative to the other two instrument types: