Turbos vs Our ETPs
Less computationally intensive than covered warrants, a “turbo” allows the investor to profit from a rise or fall in the price of the underlying security. The initial investment for a turbo is often lower than that required for direct investment in the underlying for the same absolute return. The rest is supplemented with financing from the product provider – this is the “leverage” in turbos and is their main feature. The higher the leverage, the greater the exposure to the price movement of the underlying asset.
The leverage is determined by selecting a “knock-out” level, i.e. the price at which the turbo becomes worthless. With “long turbos” the knock-out level must be below the current market price of the underlying and vice versa in the case of “short turbos”. The closer the knock-out level is to the current price, the higher the leverage.
To illustrate this feature, assume the underlying is currently valued at €100 in the underlying market, and the investor chooses a long turbo with a knock-out level of €90. The price of the turbo (excluding costs, etc) is 100 – 90 = €10.
If the underlying asset rises by €10 to €110, the turbo will track this new price and its new value will be: 110 – 90 = €20. That is, the initial €10 investment has had a 100% increase in value, effectively delivering a 2x return.
On the other hand, if a knock-out level of €75 is selected, the initial price of the turbo is €25 and its new value will be €35 when the underlying moves to €110. This is, by comparison to the earlier case, only a 40% increase in value. Needless to say at this point, if the underlying falls to €90 or below, the value of the turbo is now zero and the initial investment made is effectively lost.
Our ETPs, in comparison:
- Do not have a “knock-out level”. The investor is provided by the benefit or penalty of the underlying’s price movement multiplied by the leverage factor and the effects of daily compounding.
Note: This applies even in the event of an investor’s preferred broker offering fractional ownership of our products.
- Have a redefined form of “market risk”, just as with warrants, which may be considered far less complex for the investor.
Note: There’s a hybrid of warrants and turbos called a “turbo warrant” (also known as a callable bull/bear contract). It is essentially a barrier option and has both features compounded and is typically very highly geared on account of high knock-out probabilities. The arguments made in favour of our ETPs over warrants hold true, even when compared to turbo warrants
Leverage Certificates vs Our ETPs
Leverage certificates are structured financial instruments that offer investors a fixed leverage factor on the daily performance of the underlying asset. Like our ETPs, they:
- are rebalanced on a daily basis
- have an airbag feature that is triggered when the underlying falls a certain amount in a single day.
The language employed to define leverage certificates can be confusing: Constant Leverage Certificates replicate the performance of the underlying asset multiplied by the leverage factor and the loss is limited to the initial amount invested, just like our ETPs.
Variable Leverage Certificates, on the other hand, assign the right to buy (bull) or sell (bear) an underlying asset at an established strike price and date (“time to maturity”). This is very similar to covered warrants and unlike our ETPs, which simply offers exposure to the performance of the underlying multiplied by the leverage factor without a “time to maturity” feature.
However, like our ETPs, variable leverage certificates also offer price matching between the underlying and certificate’s intrinsic value along with independence from volatility of the underlying.
Unlike our ETPs, Variable Leverage Certificates have the following features:
- a “stop loss” level, which, if reached or exceeded by the underlying during the life of the certificate, causes the instrument to expire in advance, limiting the loss to just the invested amount.
- a daily variation in strike price with interest charged (bull certificate) or credited (bear certificate) by the issuer included.
However, compared to our ETPs, leverage certificates (both Constant and Variable) suffer from:
- Credit Risk:
When buying leverage certificates, the investor is buying a product backed by nothing other than the creditworthiness of the issuing entity, with no specific assets guaranteeing the return of those products. If the issuer defaults (as Lehman Brothers did in 2008 and others throughout the years), its leverage certificates are likely to expire worthless. This is called “credit risk”. Our ETPs, by contrast, are backed by the physical holding of underlying assets which are segregated from Leverage Shares (in other words, Leverage Shares cannot use those underlying assets, they are held by an independent trustee for the benefit of our investors).
- Liquidity risk:
The secondary market of leverage certificates may be illiquid, making it harder for the investor to buy or sell them when they want to. By contrast, our ETPs have multiple market makers and a dedicated market maker, independent from and paid by the issuer to provide liquidity continuously during at significantly tighter spreads and greater minimum amounts than are required by the exchange.
- High (and often) hidden costs:
Leverage certificates have a complex cost structure that include management fees and, if held overnight, additional costs such as the spread on the bid & ask prices of the underlying, a “gap premium” for the hedging cost to prevent a loss greater than the initial investment as well as funding and rebalancing costs. In comparison, our ETPs have a very simplified and transparent structure of costs
Also, when specifically compared to Variable Leverage Certificates, our ETPs do not have a stop loss level or a daily strike price being set. This, like in previous comparisons, helps to redefine and simplify market risk and product complexity for the investor
