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Education Series: Single-Stock ETPs

Leveraged Trading in 2020: A Quick Review

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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
2020 has been an interesting year: we watched the unforeseen effects of the pandemic play out on the markets along with the rise of dark horse stocks (such as Tesla). Adding to the confusion was the long-overdue correction in markets due to concerns that certain tech companies were overvalued. Effective comparison of trends requires a reference point: we choose 2019 as that point in time.

Markets vs Margin Balances

To establish an indicator of investor preferences, we consider the debit and free credit balances in customers’ margin accounts as reported by FINRA. The Financial Industry Regulatory Authority (FINRA) is an independent organization that writes and enforces the rules governing registered broker-dealer firms in the United States.

  • Debit balance in a margin account is the total owed by a customer to a broker (for funds borrowed to purchase securities);
  • Free credit balance takes into account all transactions and margin requirements (this is the amount of capital available for withdrawal).

The market being considered is the S&P 500, specifically its monthly delta (i.e. the percentage rise/fall in a calendar month).

The market being considered is the S&P 500, specifically its monthly delta (i.e. the percentage rise/fall in a calendar month).

In 2019, a fairly typical picture of the trends in balances versus the market can be seen:
It is evident that investors – on average – remain substantially invested in the market (as seen by the near-constant levels in credit balance) while the debit balance is largely in trend with market rise and falls.

In 2020, the landscape seen was as follows:
The first few months of the year saw the pandemic take its toll on the market. This led to investors accumulating dry powder in their credit balances during these months, which subsequently reduced as the market began to boom from April till June 2020. Debit balances showed a similar but opposite trend in these initial months.

The market correction in September, however, showed that while credit balances increased slightly, debit balances also rose. This duality is likely the result of multiple factors at play: more investors having entered the market (using margin) and existing investors remaining on the sidelines, observing the choppy markets playing out.

Short & Leveraged (S&L) ETPs in 2020

In 2020, investments into S&L ETPs reached an all-time high, surpassing $85 billion in assets under management. Equities-based ETPs maintained 88% of all investments while debt-based ETPs experienced the largest relative decline (see below).
Despite a rise in overall investments, the number of ETPs in the market has shrunk by nearly 18% year-on-year.
This is attributable to two factors:

  • Closures of debt-based ETPs that failed to gain popularity and commodity-based ETPs in the aftermath of the oil market crash in March 2020;
  • The continued longevity of prominent ETPs in the equities space.

Leverage Trends for Equities in 2020

Taking a two-year view, i.e. from Jan 2019 through Dec 2020, the net investment and leverage trends in equities reveals the following picture:
Since the start of 2019 until March 2020, there had been a trending decrease in both net positions in leveraged ETPs as well as the amount of leverage used. However, once markets began to recover, so did the aforementioned criteria – hindered only by the market correction in Q4 of 2020. The net leverage has now improved to pre-2019 levels while net positions have risen by over 28% since the start of the year and have now surpassed pre-2019 levels.

However, analysing net flows into equities-based ETPs (i.e. new money coming in minus money going out) adds an additional layer of complexity to the analysis:
Given the increased investments into equities-based ETPs but with a decrease in net position, it can be estimated that investors in 2020 strongly favoured short ETPs, typically in the -1x to -3x range, over long leveraged ETPs, in the 2x to 3x range (or more). This is supported by the net increase inflow into short ETPs.

In short, a significant proportion of investors have shifted their perception (and funds) towards a bearish market scenario as 2020 ended with no clear trend in either direction. Nonetheless, the trends do not seem to signify a “flight” of funds from leveraged ETPs into short ETPs (as of yet).

In Conclusion

While investors remain committed to the stock market, there is some indication that they are somewhat ambivalent on the direction it will take. Given the current market landscape, ETPs are gaining ever-increasing traction as a viable component of portfolios for making tactical gains.

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.

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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.

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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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