It’s obviously difficult to know which company within a particular sector or theme is going to be the champion performer over time. When in doubt, an investor can always build a “basket” of single-stock ETPs around a theme in order to get non-diluted exposure for a particular trading strategy.
In this article, we’ll take a quick look into the ideas of “baskets” and present a number of moments when baskets built with Leverage Shares ETPs have shown strong performance.
Basics of Basket-Building
A “basket’ is simply a collection of instruments that are traded simultaneously. The concept is familiar for investors who have previously invested in ETFs, which often provide exposure to a broad basket of stocks. Creating more targeted exposure via smaller baskets allows investors to choose their own investments rather than investing in (too) many products, some of which may not not necessarily ‘belong’. It’s a particularly important tool for institutional investors and investment funds looking to hold multiple securities in certain proportions since simultaneous trades hold in place the portfolio allocation for each security.
It’s not particularly difficult for investors to conceive and build a basket: all that’s needed are a few building blocks to crystallize an idea.
The “first block” would be the type of security. In the examples we present here, the securities we use will be our 3X long ETPs available for sophisticated investors.
The “second block” would be the rebalancing frequency, i.e. how often would the ETPs be held before being rebalanced to the target exposure (equal weighted, market cap weighted, custom weighted, etc.)? In the examples we present here, since the standard recommendation is that leveraged instruments shouldn’t be held for more than a day, we shall set the basket rebalancing frequency at “daily”.
The “third block” would be the invested amount. In the examples we present here, we make an initial investment of $10,000 and then use the proceeds to finance subsequent rebalancing.
The “fourth block” is the allocation rule, i.e. in what proportion are the 3X ETPs to be held? In the examples we present, the allocation rule would be equally-weighted. The closing price of the day would determine the weight of each ETP held.
The “final block” would be the basket’s theme. This is the central idea behind the investor holding the ETPs in question. Each of the examples we present will be based on a different idea previously presented in Leverage Shares’ “Market Insight” section over the past few weeks.
Throughout this article, two benchmarks will be used: the tech-heavy Nasdaq-100 (NDX) and the broad-based S&P 500 (SPX). The holding period for each basket will be a minimum of one calendar month.
Exploring Themes
The first theme we’ll outline is the “Gig Economy” which – as highlighted in an earlier article – feature heavy-hitters Airbnb and Uber. As the global economy recovered from the pandemic in Q1 2021 and lockdowns eased, it would be a fair assumption that these two stocks might do well.
In the calendar month of February 2021, the basket of 3X Airbnb (ABN3) and Uber (UBR3) ETPs reached a performance of over 60% before closing out the month with a net 12% in gains. The benchmarks NDX and SPX were down 3% and up 0.9%, respectively.
