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.
Over this educational series till now, we have summarised the benefits, construction and tracking of Leverage Shares’ Single-Stock ETPs that brings to the savvy investor many different opportunities to enhance their portfolio returns.
There are, however, a number of things that one would need to keep in mind.
1. Underlying Price Does Not Fully Reflect ETP Levels
Please bear in mind that Short and Leveraged ETPs (S&L ETPs) are complex instruments that can be risky. While a leveraged/inverse index uses the end-of-day price of the underlying stock to define the closing level of the index, the price of the ETP itself does not have direct linear relationship with the underlying stock itself.
The Net Asset Value (NAV) of the ETP is calculated shortly after the exchange closes for the day. The price of an ETP at any point of time (also known as its “Fair Value”) can be calculated as follows:
ETP Fair Value=NAV_0×[1+ΔU-Costs]
where:
N
AV0 = Most Recent ETP NAV and;
ΔU = Performance of underlying since NAV0 was calculated
The “underlying” here in case of Leverage Shares ETPs is a single-stock leveraged or inverse index offered by iSTOXX or NYSE.
The cost factor makes the relationship between the underlying and the ETP non-linear. In fact, to maintain clarity in conveying ideas, our research does not account for costs when displaying examples of viable strategies. The schedule of costs for ETPs is outlined in this part of the series.
2. Be Careful Which Index You’re Comparing Your Strategy Against
Our ETPs track the Net Total Return (NTR) index of the underlying single-stock index and not the price index. A price index only considers price movements while the NTR index includes dividends, interest, rights offerings, and other distributions realized over a period of time. While the NTR method is generally considered to be a more precise form of measurement, its trajectory can often be distinct from that of a price index.
The paying out of a dividend by a company often reflects favourably on its ability to continue operations or is considered as a signal to investors regarding the company management’s commitment to continually enhance the company’s value.
However, while the NTR index is being tracked for the ETP, the investor does not receive any portion of the dividends paid out on the underlying stock. The dividends that we receive while physically holding the underlying stock to build these products are reinvested in purchasing more shares of the underlying stock in order to better manage the changes in exposure required to maintain the promised leverage factor on a daily basis.
3. Closing Price and NAV Need Not Be At the Same Level
Our ETPs are, of course, exchange-traded products. This means that, very often, the ETP price you see on your trading screen would be based on the fair price calculated and paid by another investor.
Assume a certain amount of time has passed since the last trade in a particular ETP (say 5 minutes). If the underlying has moved on from its price since the ETP was last traded, the Fair Value of the ETP has now changed. When you decide to enter into a trade at this point, the price will be related to the changed Fair Value and not the last ETP price you see.
Also, the NAV for each ETP is calculated as per the price seen at the end of the day in the US exchange and not based on the last price seen when the ETP is traded in the LSE or Euronext. For instance, NYSE and Nasdaq close at 21:00 GMT while the LSE and Euronext close at 16:30 GMT and 17:30 GMT, respectively.
4. ETP Levels Can Change Overnight
While the ETP cannot be traded once the LSE or Euronext closes for the day, the underlying stock doesn’t stop trading; trades on the stock continue to be made around the world.
This means that the Fair Value of the ETP continues to change in tandem with the underlying stock even if the ETP cannot be traded. Therefore, there can be a significant variance between the quoted price of an ETP near the market close on one day and the quoted price for that same ETP at the start of trading in the next. To prevent the prospect of significant fluctuation, a cautious investor would be well-advised to sell the ETP near end of market hours and reinvest the next morning.
Please read our previously published article on how our ETPs track U.S. stock performance for more examples.
5. Currency Fluctuations Can Confound Some Investors
In our previously published article highlighting how our ETPs track U.S. stock performance, we had discussed how the FX market fluctuates 24 hours a day. This will certainly impact the price of the ETP since they are quoted in non-US currencies while the underlying stock and index are quoted in U.S. dollars.
A savvy investor with a large investment in our ETPs is well-advised to consider hedging their currency exposure if they consider their portfolio to be sensitive to currency fluctuations. We offer European investors an investment opportunity into the performance – be it leveraged or inverse – of leading U.S. stocks but do not have currency hedging built into the same product.
6. Low AUM Does Not Mean Low ETP Liquidity
The liquidity of an ETP ultimately depends on the liquidity of the underlying stocks. Some of our ETPs may periodically have low AUM (“Assets Under Management”, i.e. amount invested as per the underlying stock’s Fair Value) on account of its recent launch or by a shift in strategy by large investors.
Depending on the liquidity of the underlying stock, we can create ETPs in large volumes very close to the fair value of the ETP based on investor demand.
And finally, it doesn’t hurt a savvy investor to take a look at our FAQ to see if all their concerns are allayed. If not, please email us.
