- What is an ETP / ETF
- Short and Leverage ETPs / ETFs
- Short and Leverage ETP providers
- What are leveraged returns
- How are leveraged returns achieved
- Daily rebalancing
- Compounding effect
- Intra day crash protection
- Trading strategies
- Who should use them
- Short and Leverage ETP / ETF comparisons
This tutorial has been created by Boost ETP to assist advisors and investors in understanding the benefits and the risks of investing in Short and Leverage Exchange-Traded Products (ETPs). ETPs include Exchange Traded Funds, Exchange Traded Commodities and Exchange Traded Notes.
To be used by:
- Stockbrokers, wealth managers and private banks to help client advisers understand Short and Leverage ETPs
- Firms providing clients access to exchanges to ensure investors fully understand Short and Leverage ETPs in assessing competency
This tutorial should be read in its entirety to ensure a full understanding of short and leveraged ETPs. A multiple choice test follows the tutorial which can be used to evaluate an individual’s understanding of short and leveraged ETPs Boost ETP is an award winning, independent and specialist provider of short and leveraged ETPs.
What is an ETP / ETF?
ETP is acronym for Exchange-Traded Product
- ETPs include ETFs, ETCs and ETNs and other exchange-traded products:
- ETFs are UCITS compliant and typically track equity or fixed income indices wrapped in a fund structure
- ETCs typically track commodity markets or FX rates. ETCs are not UCITS compliant and are structured as collateralised debt instruments
- ETNs are generally debt securities issued by a single bank and are usually uncollateralised
- ETPs are listed on an exchange and traded and settled the same as a share
- ETPs are open-ended investments and can be created and redeemed to demand
- Although each ETP Issuer may have different structures, ETP and ETF are generally interchangeable terms. Boost Short & Leveraged ETPs are structured as debt securities
Short and Leveraged ETPs
Short and Leveraged (S&L) ETPs:
- are a subset of the ETP investment strategy universe
- are investment products for active, sophisticated investors who are looking to gain amplified exposure to the markets
- should be clearly understood by investors before investing due to the features of leverage, rebalancing and compounding
- once understood, are highly efficient instruments to magnify long or short exposure of indices, sectors and asset classes
- compare favourably against other leveraged products such as CFDs, spread bets, structured products and OTC derivatives
- have been in existence since 2005 and are listed globally on US, European and Asian markets
- have approx. USD50bn in global AUM, with USD9bn in Europe covering all major asset classes
- are some of the most traded ETPs on the London Stock Exchange and other global Exchanges
- provide a valuable tool in the armoury of investors to take advantage of tactical trading and hedging opportunities
Below are the main providers of S&L ETPs/ETFs
- Boost (Independent)
- Dbx (Deutsche Bank)
- ETF Securities (Independent)
- Lyxor (Soc Generale)
- North America
- Direxion (Independent)
- ETRACS (UBS)
- Horizons (Independent)
- Powershares (Invesco)
- Proshares (Independent)
What are leveraged returns?
- Short and Leverage ETPs are designed to achieve positive or negative multiples of returns of an index, sector or asset
- Short ETPs allow investors exposure to the inverse daily returns of an underlying index, sector or asset
- Leveraged ETPs allow investors exposure to the multiples of daily returns of an index, sector or asset
- Leveraged exposure allows investors to use less capital to achieve a similar delta one return, or magnify returns using the same amount of capital as in a non-leveraged investment
Example - What are leveraged returns?
- If the FTSE 100 rises by 1% in a day, a 3x leveraged ETP will rise by 3%1. Conversely, the short ETP will fall by 3%
- If the FTSE 100 falls by 1% in a day, a 3x leveraged ETP will fall by 3%1. Conversely, the short ETP will rise by 3%
How are leveraged returns achieved?
- Financial products such as swaps, futures and options and borrowing techniques can be used to achieve short and leveraged ETP returns . Physical replication is not possible
- Leveraged ETPs typically borrow funds plus the investors capital to gain leveraged exposure of the underlying asset. The returns of the ETP will be adjusted by the cost of the borrowing
- Short ETPs will typically sell short the underlying asset and the proceeds, plus the investors capital, is placed on deposit. The returns of the ETP will be adjusted by the cost of borrowing stock and interest earned from the deposit
- “Leverage factor” refers to the exposure of the underlying index, sector or asset and typically include: +/-3x, +/-2x, -1x
Example- How are leveraged returns achieved?
3x Leverage ETP
- Investor buys $100 of a Boost 3x Leverage Daily ETP
- Investor receives $300 of exposure consisting $100 cash & $200 of borrowed funds
- Borrowing cost is deducted from the calculation of the ETP price
3x Short ETP
- Investor buys $100 of a Boost 3x Short Daily ETP
- $300 of the index is borrowed and sold short
- $400 cash ($100 from investor + $300 from short sale) is placed on deposit
- Cost of index borrow and interest earned is included in the calculation of the ETP price
- Many leveraged and short ETPs rebalance the leverage at the end of each trading day
- Daily leverage allows investors to buy (or sell) the ETP on any day and still receive the stated leverage
- Other frequencies of leverage can be used, but the actual leverage received will depend on when the investment was made
- Daily rebalancing simplifies this
- Daily rebalancing as a result produces “compounded” returns
- Returns of longer than one day are affected by compounding due to market movements
- Daily leverage will amplify the compounding effect and may have a positive or negative effect on returns over a longer period
- The daily compounding effect may increase with the length of the holding period, volatility and leverage
The compounding effect will typically:
- achieve out-performance of the underlying index or asset in a directional trending market
- under-perform the underlying index or asset in a sideways trending market
Intra-day crash protection
- Some of the more recent S&L ETPs, such as Boost’s, have an inbuilt mechanism to prevent an ETP from falling to zero on any single day
- If an intra-day market move is extreme then the ETP would re-balance to ensure a fall to zero would not occur
- Intra-day rebalancing reduces the sensitivity of further falls or rises and ensuring participation to a rebound
- After an intra-day rebalancing , any participation to a rebound will be decreased
- Crash protection typically kicks in at 15-20% move in the index or 45-60% with 3x short or 3x leverage exposure i.e. the Boost FTSE 100 3x Leverage Daily ETP has a trigger of 20%
S&L ETPs allow investors to undertake multiple trading and hedging strategies as follows:
- Same exposure, less capital
- - With a 3x short or 3x leverage ETP an investor can gain non-leveraged exposure for a third of the capital. Allowing investors to utilise remaining capital to gain extra performance
- More exposure, same capital
- - Conversely the investor can gain 3x as much exposure using the same capital as a non-leveraged investment. This can amplify investors returns
- Hedge existing portfolio/positions
- - Managers can use Short or Leveraged ETPs to hedge existing portfolios on a tactical basis
- - Investors with long term positions concerned over market volatility or short-term losses can use Short or Leveraged ETPs to avoid closing out long-term positions and protect against short-term losses
- Make returns in a falling market
- - Most investors can only make money when the market or asset rises. It means that even though an investor has a strategy that could be profitable they can’t execute it. The advent of short ETPs means that investors have now expanded their ‘tool kit’
- Tactical investing alongside a broad portfolio
- - An investor may keep a small portion of their portfolio in cash in order to take advantage of short term trading opportunities.
- Execute hedge fund type strategies
- Short or Leveraged ETPs provide managers access to hedge fund type strategies, normally requiring complicated legal documents, significant IT and infrastructure investment. These strategies include:
- - Use in a long /short strategy using both a short ETP and a leveraged ETP
- - Use in a pairs trade to take advantage of undervalued assets
- - Short the market/asset class quickly, efficiently and cheaply
Who should use S&L ETPs?
- Sophisticated investors who understand the effect that leverage and compounding has on daily returns
- Investors that have the ability to actively monitor positions daily or frequently
- Investors that are able to tolerate significant gains or losses in a short time period
- Investors who have a shorter term investment objective
- Short and Leverage ETPs are NOT for traditional buy and hold investors
Typical clients / investors of Short and Leveraged ETPs
- Private Wealth / Banking – Advisory and Execution Only
- Institutions / Long Only Managers
- Hedge Funds
- Family Offices
- High Frequency / Index Arbitrageurs
- Sophisticated Investors / HNW
- Pension Funds
Short and Leveraged product comparisons
Boost Adviser Tool Kit
Boost provides a Tool Kit for Advisers that sits along side this Adviser/Investor Tutorial and Exam including:
t: +44 (0)20 3515 0050
Boost ETP LLP
4th Floor, 33 Sun Street, London, EC2M 2PY
Boost is an independent 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 3x Leveraged and 3x Short 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's main selling points include:
- Independent - Boost is an independent boutique ETP provider. Boost is independent from any investment bank, swap provider, market maker, trustee or custodian. As a result, investor’s interests are aligned with Boost.
- 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.
- Transparent – 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.
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.
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