Notice of Index Modifications: Ferrari ETPs

Аватар на автора

Author

Sandeep Rao

Date

Leveraged ETFs: What Are They and How They Work

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

Exchange Traded Funds (ETFs) have long been a part of many an investment plan for investors across the world. As per iShares, ETFs now account for nearly $9 trillion in Asset Under Management (AUM) around the world as Q2 2023 ended.

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

The value inherent in ETFs has been plain to most investors for years now. For a small fee (usually defined in percentage terms as Total Expense Ratio or TER) charged by the ETF issuer, investors receive diversified coverage across a large number of instruments in line with a “theme”. For instance, an ETF built around the S&P 500 offers exposure to stocks of the 500 largest publicly-traded companies across sectors. Since an ETF typically “track” an index which is, in turn, governed by rules that determine the weightage of each security within the index, the ETF’s investment strategy is driven by a rules-based approach readily accessible by the investor – thus affording the investor a high level of transparency regarding the usage of the capital they provide to the issuer.

Now, given that an ETF tracks a “theme” that could be affected by macroeconomic or even specific events, the prospect of betting on the trajectory of the theme arises. Professional investors can employ “leveraged ETFs” to do this. As per the U.S. Securities and Exchange Commission (SEC), these “leveraged and inverse ETFs” are very different from traditional ETFs:

  • Leveraged ETFs deliver multiples of the daily performance of the benchmark they track. For example, a 2x (two times) leveraged ETF seeks to deliver double the daily performance of the benchmark.

  • Inverse ETFs (also called “short” funds) deliver the opposite of the daily performance of the benchmark they track.

  • Leveraged inverse ETFs (also known as “ultra short” funds) deliver a multiple of the inverse of the benchmark’s daily performance.

The key element for investors to bear in mind is that “leveraged and inverse” ETFs deliver multiples of the daily performance of the benchmark they’re tracking. These instruments are thus “reset” daily, which tends to create confusion among some investors. Let us consider a simple example to illustrate this.

Assume the benchmark has a price of $50 today (Day 0) while 2X Leveraged ETF tracking this benchmark has a price of $10. The next day (Day 1), the benchmark goes up by 3% to reach $51.50. The 2X Leveraged ETF delivers twice the performance to reach $10.60. The day after (Day 2), the benchmark goes up by another 2% to reach $52.53. The 2X Leveraged ETF now delivers twice the performance to reach $11.02.

Many investors will add 3% and 2% together to arrive at the conclusion that the benchmark has risen 5% over two days. This is incorrect: by virtue of daily compounding, the benchmark has actually risen by 5.06% over this period. Similarly, the 2X Leveraged ETF has risen by 10.24%. Upon dividing the rise in the 2X Leveraged ETF by that seen in the benchmark, it can be seen that a 2X Leveraged ETF has delivered 2.02 times the performance (and not 2 times) of the benchmark over two days! This is not a mistake: the issuer of the Leveraged ETF is obligated to deliver multiples of the daily performance of the benchmark. The benefit seen in net performance across two days is a result of daily compounding.

Of course, it bears noting that “excess performance” over multiple days isn’t always the norm. Readers can refer to a fuller explanation of how rebalancing and compounding works in a variety of market circumstances in an earlier article here.

A core tenet in the consideration of ETFs versus Leveraged ETFs can be stated thus: investing into an ETF is equivalent to holding a conviction in the performance of the “theme” or benchmark the ETF tracks. Buying the S&P 500 is equivalent to “buying” the conviction that markets will rise over time. Many jurisdictions, in fact, reward the holding of ETFs in (say) pension plans with favourable tax treatments. However, investing into Leveraged ETPs is equivalent to “betting” on performance of the “theme” or benchmark in a short time frame. In other words, ETFs tend to be strategic investments while Leveraged ETFs tend to be tactical. Virtually every jurisdiction that has Leveraged ETFs available to investors will carry the disclaimer that no Leveraged ETF should be held for more than a day. The ideal means of investment, as per regulators, is that investors should sell their Leveraged ETFs near the end of trading hours and go back in the next day, if they wish to. Of course, given that it is a suggestion and not a requirement, many investors simply continue to hold on to their position in Leveraged ETFs for a period greater than 1 day.

The “official” nature of Leveraged and Inverse ETFs also differ by jurisdiction. For instance, Leveraged and Inverse ETFs aren’t themselves necessarily or universally considered to be ETFs. To provide the “leverage factor”, the issuer typically purchases the magnified exposure either via derivatives or futures contracts – thus making leveraged and inverse ETFs “debt instruments” as opposed to ETFs, which are considered to be “collective investment vehicles”. Another confusing trend lies in the naming conventions adopted by the industry. For instance, a leveraged/inverse instrument with a broad index as benchmark that is also tracked by many ETFs is generally called a “Leveraged/Inverse ETF” but this doesn’t mean that it is an ETF itself. An instrument magnifying the performance of a smaller set of securities (typically 10 distinct tickers) without a weighing methodology is typically termed an Exchange Traded Note (ETN) while an instrument with an even smaller set of tickers (or even one ticker) as the benchmark would be termed an Exchange Traded Product (ETP).

Regardless of the confusing nomenclature and the tactical nature of these instruments, the Leveraged & Inverse (L&I) market has been witnessing a steady growth. As of the end of June this year, it has been estimated that over 1,200 listed instruments hold over $125 billion in AUM globally.

It should also not be assumed that all L&I instruments track equity indices as benchmarks: about 15% of all AUM is held in instruments tracking commodities, fixed income and even active trading strategies as benchmarks.

Overall, be it “Leveraged & Inverse” ETFs, ETNs or ETPs, the landscape is a target-rich environment for professional investors with a penchant for actively managing their portfolio’s performance. Leverage Shares has issued about 10% of all leveraged/inverse instruments in the market today. Please click here to learn about our leveraged/inverse, non-leveraged and custom ETPs.

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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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.

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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.

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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.