- Instruments
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Since Exchange-Traded Products (ETPs) which go beyond the “traditional” Exchange-Traded Funds (ETFs) were introduced to investors through European exchanges, it should be intuitively evident that each of these products is essentially a “packaged” trading strategy that brings two useful features to the holder:
Leverage on either the upside or downside of the underlying instrument’s price trajectory;
Scalability by being several orders cheaper relative to the underlying, thus giving greater flexibility to the holder.
On the matter of leverage, however, ETPs have not been an innovator. A number of products and services already available via banks and brokerages exist that compete with ETPs in this space. Chief among them are Constant Leverage Certificates (also known as “Factor Certificates”) and Contract for Differences (CFDs). Factor Certificates have proven particularly popular among clients of private bankers for decades now, with CFDs also finding favour among high-net-worth investors. In comparison to these, however, ETPs offer a number of significant advantages (and possibly some limitations).
ETPs vs Factor Certificates and Daily Leverage Certificates
The terminology used to “define” the ETP is quite similar to that of Factor Certificates available to retail investors and for good reason: a 3X Tesla Short ETP ostensibly delivers the same benefit as a 3X Tesla Short Factor Certificate. However, the application of fees is an entirely different matter.
Let’s consider an example to illustrate this: the Tesla 3x Short Factor Certificate issued by Goldman Sachs (ISIN: DE000GX2YWR8 | WKN: GX2YWR). The Key Information Document is as follows:
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 reason why it’s considered a “close counterpart” is evident from the statements on the fee structure: while the management fee and the gap premium together only add up to 0.02% on a daily basis, hedging costs, rebalance costs, et al bring the cost of this instrument to at least 0.12% on a daily basis.
In contrast, the Leverage Shares -3X Short Alibaba ETP (Deutsche Borse Ticker: SBA3, ISIN: XS2472334585; more details here) pays the holder an annual rate of 9.82%, which translates to a daily rate of a little under 0.03% receivable by the holder.
In a similar vein, let’s consider the 5X Alibaba Long DLC (ISIN: LU2348854998) by the same issuer:
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:
The 0.15% fee is applied on a daily basis while the “annual fees” are based on the European Short Term Rate (ESTR). For instance, given that the ESTR is currently at a little under 2.4%:
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:
On the matter of fees, it bears noting that not all ETPs are constructed the same way. In the examination done for this article, the fee structure of Leverage Shares’ products was examined. Reading the Key Information Document, especially for novice investors, is therefore important.
All in all, adopting an instrument with a higher fee structure when another with a lower fee structure is available essentially means money left on the table. Also, the risk profiles tend to be rather different. Going with ETPs could often lead to significant cost savings as long as one is cognizant of risks that are typically inherent in every type of complex product. Investors unfamiliar with ETPs should, for instance, read this extensive 6-part series that goes into greater detail about the construction, features and utility of the ETPs designed by Leverage Shares.
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.
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.
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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.
