Leveraged ETFs are a version of an ETF that gives an enhanced return equal to a leveraged factor. And the leveraged factors tend to be -1x, 2x or 3x up to 5x. If you take, for example, the FTSE 100 and you traded it 3x leveraged product. If the market goes up by 2% in a day, you will get a 6% return. So what that essentially allows you to do is have different strategies in the portfolio, you can enhance return, so you get the same money to gain 3x the exposure or you can use a third of the money to gain the same exposure as if you put a straight delta one trade on to the market.
The advantages are that it trades as a share so you can get very simple access to the stock exchange if you’ve got a brokerage account with any retail broker. So you get very easy access for relatively cheap, they tend to be around 60-80 basis points on an annualized basis, which is 6 or 1% upper year, which means that if you hold it for one day, you’ll pay 365th of that and because it trades as a share, you can also hold it in your equity account, which includes SIPPs and ISAs, which are very straightforward for investors to use.
The market globally is about $70bn in short leveraged ETPs. In Europe, it’s about $10bn, so it’s a relatively small market compared to the overall ETF market which is about $500bn in Europe. But it’s growing at a very rapid pace, in fact it’s growing probably a bit quicker than the overall ETF market. They’re performing pretty well, they do what they say on the tin so if the market goes down, they go down, if the market goes up, they go up.
So obviously, it amplifies the returns to you, you not only get the ability to enhance your returns if you get the trade right, but you also get the ability to lose more money by amplifying the losses if you get the call wrong. So really it all revolves around whether the client gets the trade right or wrong at the end of the day.
But I think where the growth is really coming is people’s attitude to ETFs generally and seeing them as a great tool to access asset management exposures and given that they’ve not had the ability to leverage those until now, you know people are taking that on board very quickly.
Well, they are much more of a specialized product, so what I would say, is that it’s really important that investors understand what they’re trading before they actually trade it.
So I wouldn’t say it’s for the common and garden investor, certainly for the more sophisticated investor who can understand the returns that they’re getting but also can actually bear the losses that they could potentially get by having the leverage in there.