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.
European investors are no stranger to trading with leverage. Leverage Shares’ range of ETPs offer an alternative to many other products such as warrants, turbos and leveraged certificates.
In many respects, as we highlighted in Part 1, these alternatives may seem comparable to ours in terms of benefits:
So how do our ETPs stack up against these products? In this part of the series, we highlight the key features of these leveraged products and the distinctions between them and our single-stock ETPs.
Warrants vs Our ETPs
Covered warrants are issued by financial institutions and give the holder the right, but not the obligation to buy or sell an underlying asset, at a specified price (also known as “strike price”), on or before a predetermined date.
Note: These are fundamentally different from traditional warrants, which don’t have “call” (right-to-buy) or “put” (right-to-sell) features and are very similar to a rights issue made to attract investors.
Where covered warrants differ from standard options are that:
Where covered warrants are similar to standard options are that:
Warrants also have a stated “conversion ratio”, which is simply the number of warrants needed to buy or sell one unit of the underlying. A covered warrant’s leverage is referred to as its “gearing” and is computed as the ratio of the current stock price to the product of the warrant price and its conversion ratio.
There are two primary sources of risk when it comes to covered warrants:
Our ETPs, in comparison:
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:
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:
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:
However, compared to our ETPs, leverage certificates (both Constant and Variable) suffer from:
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).
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.
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
All of the products discussed here in relation to our ETPs don’t need margin accounts or margin level maintenance, have fairly competitive and transparent pricing mechanisms and are quite popular among European investors.
However, key differences must be noted:
We believe our physically-replicated ETPs are the latest stage in the evolution of leverage products: we take the best features from the products that have been with us for decades and improve on them through superior pricing, risk reduction and liquidity, delivering a better all-round investor experience. If one were to analyse risks and costs, the summary of benefits in favour of our single-stock ETPs versus these alternatives can be summed up as follows:
Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.
Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.
Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.
Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.
Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.
È entrato in LS da UniCredit, dove è stato responsabile delle relazioni aziendali per le multinazionali. La sua precedente esperienza è in finanza aziendale e amministrazione di fondi in società come IBM Bulgaria e DeGiro / FundShare.
Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.