Leverage has been around for hundreds of years, however short and leverage ETPs have been in existence since 2005. Today there are almost $51bn (Boost ETP LLP estimate) of assets in leveraged and short ETPs which are traded on most of the major global stock exchanges. Due to the combined features of leverage and daily compounded returns these types of ETPs are trading instruments that need to be clearly understood before an investor should trade or invest. However, once understood they are highly efficient tools that provide magnified long and short exposure in an efficient product wrapper.
The following are eight key things to know about short and leveraged ETPs.
1. Leveraged returns
Leveraged returns allow an investor to magnify the daily returns of an unleveraged investment. For example, the charts below show that if the FTSE 100 rises by 1% in a day, the Boost FTSE 100 3x Leverage Daily ETP (3UKL) will rise by 3% (excluding fees and adjustments). Conversely, if the FTSE 100 falls by 1%, the Boost FTSE 100 3x Short Daily ETP (3UKS) will rise by 3%. Leverage returns allow an investor to either use less of their capital to achieve a similar investment (2/3 less in the case of 3x leverage) or to magnify returns using the same amount of capital.
2. What indices do short and leveraged ETPs track?
Boost short and leverage ETPs track a range of liquid, blue-chip indices published by the world’s leading index providers. Boost ETPs either track a specially designed 3x daily leveraged or 3x daily short index (such as the ShortDAX X3 TR EUR Index) that calculates the leveraged return inside the index, or they track an unleveraged index (such as the NASDAQ Commodity Crude Oil ER Index) and for which the 3x or -3x daily leverage is applied through application of a formula similar to that used by a short or leveraged index. In either case, the economic effect of both calculation methods is the same.
3. How is the short and leverage position achieved?
If an investor buys £100 of a Boost 3x Leverage Daily ETP, the investor receives £300 of exposure consisting of £100 cash and £200 of borrowed funds (charged at the interbank lending rate) to achieve an investment of £300. The borrowing cost is deducted from the daily return and is either incorporated into the index or is incorporated in the calculation of the ETP price, such that all ETPs are calculated in a similar manner.
If an investor buys £100 of a Boost 3x Short Daily ETP the following investment is effectively made; £300 of the index is borrowed and sold short. The £400 cash (£100 from the investor and £300 from the short sale of the index) is then invested at inter-bank cash rates. The cost of the stock-borrow and interest income on the cash is incorporated into the calculation of the ETP price each day, such that all ETPs are calculated in a similar manner.
4. Daily re-balancing
Boost Short and leverage Daily ETPs rebalance their leverage at the end of every index trading day, providing investors with a 3x or -3x daily returns. This is slightly different to using margin or buying or selling a futures contract to obtain leverage. Daily ‘constant leverage’ is used because an open-ended ETP allows for investors to buy and sell the ETP on any day and still receive the stated leverage multiple. Leverage based on a ‘constant dollar’ amount is not possible as the amount of leverage experienced by each investor depends on the amount and day the investment was made. Monthly leverage (or some other frequency of re-balancing) could be used but then the actual leverage an investor was exposed to would depend on what day of the month they bought the investment. Daily leverage simplifies this issue.
5. Compounding - its effects
As with any investment, returns over periods longer than one day are affected by compounding due to market movements (like a bank account may compound interest over many months). Daily leveraged exposure means the compounding effect will be amplified and occur daily, which can have a positive or negative effect on returns over longer periods. If the FTSE 100 price is £100 and rises by 1%, the Boost FTSE 100 3x Leverage Daily ETP (3UKL) will rise by 3% to £103 (excluding fees & adjustments). If the FTSE 100 then falls by 1% the next day, then 3UKL will fall to £99.91. Thus over the two days the average return is 0%, however the 2-day compounded ETP return is -0.09%. The Index would also have an average return of 0% but its price would be £99.99 and its 2-day compounded return would be -0.01%. The daily compounding effect may increase with the length of a holding period, index volatility and leverage.
The charts below show the effects of compounding on returns. In the first chart labelled “Volatile Market” the index moves up and down by 2% per day. After 11 days, the Index is up by 1.8%, the Boost 3x Leverage Daily ETP would be up only 4.1% (2.3x the Index) and the Boost 3x Short Daily ETP is down 7.7% (-4.3x the Index). The second chart labelled “Trending Market” shows the outcome over 11 days, where the index increased by 2% each day. After 11 days, the Index is up by 24.3%, the Boost 3x Leverage Daily ETP would be up only 89.8% (3.7x the Index) and the Boost 3x Short Daily ETP is down 49.4% (-2.0x the Index). However, on a day to day basis, the Boost 3x Leverage Daily ETP and Boost 3x Short Daily ETP has done exactly as it is supposed to do. The effects and risks of daily leverage is explained more fully in the Prospectus of Boost Issuer PLC (which can be found on www.boostetp.com).
6. Intra-day crash protection
Boost ETPs have an inbuilt mechanism that is designed to prevent the ETP from falling to $0 in one day. If a market move is extreme, for example if the FTSE 100 falls by 20% (60% including leverage) then 3UKL would rebalance intra-day to ensure that the ETP does not go to $0. This rebalancing is a similar process to the daily rebalancing which occurs at the end of every day. The intra-day rebalancing reduces the sensitivity of further falls below 20% while maintaining some exposure to a rebound. Similarly, if the FTSE 100 rises by 20%, then 3UKS would rebalance intra-day.
7. Uses and trading strategies
Boost short and leverage ETPs can be used by a wide range of investors for many different trading strategies:
- Treble daily returns, positive or negative (excluding fees and adjustments)
- Hedge existing positions in one simple trade
- Use in a long-short strategy using both a Boost 3x Leverage ETP and a Boost 3x Short ETP
- Use in a pair trade to take advantage of undervalued assets
- Short the market/asset class quickly, efficiently and cost-effectively
- Buying a Short ETP allows the investor to profit in a falling market
- Use tactically within a broad portfolio where an investor holds strong short term convictions
8. Leverage ETPs and possible risks
Leverage ETPs have been fiercely debated in investor circles as to whether they are risky and/or complex investments. Leverage has been around for many centuries and a multitude of financial products exist to enable investors to gain leverage and/or short exposure. An investor should understand the benefits and risks of each leverage product and see which one suits their goals and circumstances for the specific trade being considered. Short and leverage ETPs increase the tools available to investors, and used in the right way, short and leverage ETPs can enhance returns. What short and leverage ETPs do provide is a robust, transparent, exchange-traded, collateralised, secure and relatively cost efficient tool for a wide range of investors to gain leverage or short exposure, through their normal brokerage or investing channels.
N.B The information contained in this factsheet is not intended to represent all the risks associated with Leverage and Short ETPs, nor does it list all the important factors one should consider when reviewing whether a Boost ETP is appropriate. Investors should review and understand the Prospectus including the “Risk Factors” section before any investment into Boost ETPs.
About Boost ETP
Boost is an award winning ETP provider, one of few independent providers of specialised Exchange Traded Products (ETPs) in the European market and is the first to focus on Short and Leveraged ETPs. Boost brings something new to the European market with the aim of adding value to investors. This is in contrast to the broad 'supermarket' offerings that the majority of ETP Issuers provide today. Boost's offering targets sophisticated investors including day traders, stock brokers, wealth managers, high frequency traders and institutional investment managers.
Boost ETP's key features include:
- Independence - Boost is an independent boutique ETP provider. Boost is independent from any investment bank, swap provider, market maker, trustee or custodian.
- Best of breed – Boost’s founders have over 20 years of experience in the ETP market. With that experience, plus the wealth of experience provided by Boost’s world class service providers, investors are able to enjoy efficient products with liquidity, strong counterparty risk management and relatively low costs.
- Transparency – Boost discloses all fees, collateral holdings and details on its website each day.
- Innovative and nimble - Boost aims to be a leader in innovation. This will be evidenced by the ETPs issued, as well as the product development and market research behind the products.
- Focused and specialised - Boost's strategy differs from the existing ETP issuers by not focusing on being everything to everyone.
- Education - Boost will focus on providing all the educational and thought leadership tools needed by investors.
If you would like further information about Boost ETP’s product range or any of the content within this fact sheet, please email firstname.lastname@example.org, or call +44 (0)20 3515 0050.
This communication has been provided by Boost ETP LLP which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority.
The products discussed in this document are issued by Boost Issuer PLC (the “Issuer”) under a Prospectus approved by the Central Bank of Ireland as having been drawn up in accordance with the Directive 2003/71/EC. The Prospectus has been passported from Ireland into the United Kingdom and is available on the websites of the Central Bank of Ireland and the Issuer. Please read the Prospectus before you invest in any Exchange Traded Products (“ETPs”).
Neither the Issuer nor Boost ETP LLP is acting for you in any way in relation to the investment to which this communication relates, or providing investment advice to you. The information is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment. You are advised to seek your own independent legal, investment and tax or other advice as you see fit.
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. ETPs offering daily leveraged or daily short exposures (“Leveraged ETPs”) are products which feature specific risks that prospective investors should understand before investing in them. Higher volatility of the underlying indices and holding periods longer than a day may have an adverse impact on the performance of Leveraged ETPs. As such, Leveraged ETPs are intended for financially sophisticated investors who wish to take a short term view on the underlying indices. As a consequence, Boost ETP LLP is not promoting or marketing Boost ETPs to Retail Clients.
Investors should refer to the section entitled "Risk Factors" and “Economic Overview of the ETP Securities” in the Prospectus for further details of these and other risks associated with an investment in Leveraged ETPs and consult their financial advisors as needed.
This marketing information is derived from information generally available to the public from sources believed to be reliable although Boost ETP LLP does not warrant the accuracy or completeness of such information. All registered trademarks referred to herein have been licensed for use. None of the products discussed above are sponsored, endorsed, sold or promoted by any registered trademark owner and such owners make no representation or warranty regarding the advisability on dealing in any of the ETPs.