Our Short & Leveraged Single-Stock ETPs could be challenging for some investors looking for new innovative products to add to their portfolio. In this six-part educational series, we describe the idea behind our products, their construction, features and their benefits to investors as well as when compared to other similar-seeming products.
Leverage Shares ETPs come with a variety of leverage factors – offering amplified returns with a simple trade. As we know, however, there’s no such thing as a free lunch: using additional exposure is coupled with taking on additional risk. Capturing the trend could prove lucrative but mistiming the move could magnify losses in the blink of an eye.
In theory, a 3x leveraged product could become worthless if the underlying stock lost more than 1/3rd of its value during the trading day.
This is why Leverage Shares ETPs come equipped with an “airbag mechanism” built into the methodology of the indices they track and into the administration of every product so they can replicate it as best as possible. This feature is triggered when the underlying stock loses more than x% (in leveraged indices) or appreciates by more than x% (in short indices) during a trading session compared to previous day’s close. Trading is then halted while prices are recalculated tick-by-tick for a short period of time (about 10-15 minutes). The recalculation is done using the prices of the underlying shares over this time. Trading then resumes as if it is a brand-new trading day.
The respective trigger values for most (but not all) of the Leverage Shares ETPs are:
| Leverage Factor |
Trigger Value (x) |
| 21 |
-25% |
| 3 |
-16.67% |
| -1 |
50% |
This feature has unique characteristics, depending on the scenario.
Scenario 1: “Skid”
Let’s consider a hypothetical stock traded in NYSE with a previous day close of $350 and an initial 3x ETP set at $100.
In this scenario, the stock experiences a decline in price during the day and finishes 32.67% down from its previous close. A 3x ETP without the “airbag mechanism” would haemorrhage in value and be close to wiped out, losing a theoretical 32.67% x 3 = 98% of its value.
However, with the “airbag mechanism” enabled, the ETP is rebased at 11:30 (assuming the underlying stock had fallen 16.67% by 11:15) and the 3x ETP is reset and the rest of the session treated as a brand-new day. There is another reset at 13:30 (when the stock decreases another 16.67% relative to the price at first reset) and the 3x ETP is reset once again. The third reset happens at 16:00 and the 3x ETP is reset again. As a result of the intraday rebalances, the 3x ETP is down only 68% by the end of the day. This ‘intraday rebalance’ can occur multiple times throughout the trading day (i.e. every time the underlying drops by 16.67%).
