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) 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.
