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ETPs vs CFDs and Leverage Certificates

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

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:

  1. Leverage on either the upside or downside of the underlying instrument’s price trajectory;

  2. 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) 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) 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) 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 – which is a systematic strategy – and the Wahed FTSE USA Shariah ETP – 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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Julian Manoilov

Marketing Lead
Julián se unió a Leverage Shares en 2018 como parte de la principal expansión de la compañía en Europa del Este. Él es responsable de diseñar estrategias de marketing y promover el conocimiento de la marca.

Violeta Todorova

Senior Research

Violeta se unió a Leverage Shares en septiembre de 2022. Ella gestiona la realización de análisis técnicos, investigación macroeconómica y de acciones, y ofrece información valiosa que ayuda a la definición de estrategias de inversión para los clientes.

Antes de unirse a LS, Violeta trabajó en varias empresas de inversión de alto perfil en Australia, como Tollhurst y Morgans Financial, donde pasó los últimos 12 años de su carrera.

Violeta es una técnica de mercado certificada de la Asociación Australiana de Analistas Técnicos y tiene un Diploma de Postgrado en Finanzas e Inversiones Aplicadas de Kaplan Professional (FINSIA), Australia, donde fue profesora durante varios años.

Oktay Kavrak

Head of Communications and Strategy

Oktay se incorporó en Laverage Shares a fines de 2019. Él es responsable de impulsar el crecimiento del negocio al mantener relaciones clave y desarrollar la actividad de ventas en los mercados de habla inglesa.

Él vino de UniCredit, donde fue gerente de relaciones corporativas para empresas multinacionales. Su experiencia previa es en finanzas corporativas y administración de fondos en empresas como IBM Bulgaria y DeGiro / FundShare.

Oktay tiene una licenciatura en Finanzas y Contabilidad y un certificado de posgrado en formación empresarial de Babson College. También es titular de una certificado CFA (Chartered Financial Analyst).

Sandeep Rao

Investigación

Sandeep se unió a Leverage Shares en septiembre de 2020. Está a cargo de la investigación de líneas de productos existentes y nuevas, clases de activos y estrategias, con un enfoque particular en el análisis de eventos y desarrollos recientes.

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Sandeep tiene una maestría en Finanzas, así como un MBA del Illinois Institute of Technology de Chicago.

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Ciertos documentos disponibles en el sitio web han sido preparados y emitidos por personas distintas de Leverage Shares Management Company. Esto incluye cualquier documento del Folleto. Leverage Shares Management Company no es responsable de ninguna manera por el contenido de dicho documento. Excepto en esos casos, la información en el sitio web se ha proporcionado de buena fe y se ha hecho todo lo posible para garantizar su precisión. Sin embargo, Leverage Shares Management Company no será responsable de las pérdidas ocasionadas como resultado de la confianza depositada en cualquier parte del sitio web y no garantiza la exactitud de la información o el contenido del sitio web. La descripción de cualquier ETP de Valor a la que se hace referencia en este sitio web es general. Los términos y condiciones aplicables a los inversores se establecerán en el Folleto (disponible en el sitio web) y deben leerse antes de realizar cualquier inversión.


Advertencias de riesgo


El valor de una inversión en ETP puede disminuir o aumentar, y el rendimiento pasado no es un indicador confiable del rendimiento futuro. El comercio de ETP puede no ser adecuado para todos los tipos de inversores, ya que conllevan un alto grado de riesgo. Vd. puede perder toda su inversión inicial. Solo especule con dinero que pueda permitirse perder. Las variaciones en los tipos de cambio también pueden hacer que su inversión suba o baje de valor. Las leyes tributarias pueden estar sujetas a cambios. Asegúrese de comprender completamente los riesgos. Si tiene alguna duda, solicite asesoramiento financiero independiente. Los inversores deben consultar la sección titulada «Factores de riesgo» en el folleto correspondiente para obtener más detalles sobre estos y otros riesgos asociados con una inversión en los valores ofrecidos por el Emisor.


Inversión apalancada


Los productos cotizados en bolsa (ETPs) ofrecen exposición a riesgo apalancada y solo son adecuados para inversores experimentados con conocimiento de los riesgos y beneficios potenciales de las estrategias de inversión apalancadas.

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