DIY Investor Magazine
/
December 2015
57
This article by Boost ETP looks at short and leveraged
products. Almost $61bn is invested in short and
leveraged ETPs which are traded on most of the major
global stock exchanges. With the combined features
of leverage and daily compounded returns, these are
trading instruments that need to be clearly understood
Exchange Traded Products (ETPs) the umbrella term for Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs) and
Exchange Traded Commodities (ETCs) provide exposure to all asset classes including equities, commodities, fixed income,
currencies and alternatives.
AN INTRODUCTION TO SHORT & LEVERAGED
EXCHANGE TRADED PRODUCTS
by an investor. However, once understood they can
be highly efficient tools, providing magnified long and
short exposure in an efficient product wrapper. In this
short video, CEO of Boost, Hector McNeil provides an
introduction to short and leveraged ETPs
Boost has education, transparency and thought
leadership at its core and herein considers eight key
things that it believes investors need to know about
short and leveraged ETPs, using its own products as
examples.
LEVERAGED RETURNS
Leveraged trading means getting exposure to an
underlying asset without paying the full cost. Anyone
who has bought a house with a mortgage has done
it. Consider an example where you buy a house worth
£300,000 with a deposit of £50,000 and a mortgage of
£250,000. For £50,000 you have exposure to an asset
worth £300,000.
Theoretically, if your house increases in value by 10%
to £330,000 you could sell it, pay back the bank and
pocket the remaining £80,000. That’s £30,000 more
than you invested, and a 60% profit from a 10% rise in
the house price. In investment terms we call this 6 times
gearing as your profit is 6 times greater than the move
in the underlying asset. Importantly, there is another
lesson to learn. Gearing works against you too. If the
house falls in value to £270,000, your equity would be
slashed to £20,000 as you still owe the bank £250,000.
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.
Index
Boost3x LeveragedDaily ETP
BOOST 3X LEVERAGED DAILY ETP
1%
3%
-
1%
-
3%
UPDAY FORTHE INDEX
DOWNDAY FORTHE INDEX
BOOST 3X SHORT DAILY ETP
Index
Boost3x ShortDaily ETP
1%
3%
-
1%
-
3%
UPDAY FORTHE INDEX
DOWNDAY FORTHE INDEX
(Source: Boost ETP LLP)
