- WisdomTree Europe recognises recent U.S. Federal Reserve Board Paper as opportunity for evaluation of Short and Leverage Exchange Traded Products (“S&L ETPs”)
- Company believes S&L ETPs have significant benefits compared to other forms of leveraged trading
- Investors who use S&L ETPs often use them to hedge their portfolios, therefore helping prevent short term sell offs
- BOOST, a WisdomTree company and Europe’s award winning specialist in S&L ETPs, experienced AUM growth of almost 300% over the past 12 months, reaching $165m on 31 December 2014
WisdomTree Europe, an exchange traded fund (“ETF”) and exchange traded product (“ETP”) sponsor, and specialist in short and leverage (S&L) ETPs through the BOOST ETP product range, welcomes the continued analysis of the S&L ETP market. A recent paper by Ivan Ivanov and Stephen Lenkey of the U.S. Federal Reserve is the latest contribution to this discussion. WisdomTree Europe encourages the evaluation of the S&L ETF/ETP structure and mechanics, and believes that fact-based analysis will lead to a better understanding of their unique features from which investors may benefit.
We believe S&L ETPs are structurally sound, serve an important role in the market for tactical traders and investors, and have performed this role admirably during some of the most volatile and stressful periods in recent market history.
ETPs are market access tools. Generally, ETPs do not invent trading or investment strategies, but rather give investor’s the tools to express their views. S&L ETPs have a total of $58 billion(1) of assets under management (AUM) globally, most of which is in extremely liquid underlying asset classes such as the S&P 500, FTSE MIB, Natural Gas, and Oil. This amount represents approximately 2% of total global ETP AUM (of just less than $3 trillion) (2) , which would have been less than 5% of total global long-term AUM (3).
Perhaps more importantly, S&L ETPs are a small fraction of assets and trading volumes compared to other derivative products such as margin trading, prime brokerage, CFDs/spread bets, futures, options, structured products, certificates, warrants, swaps, shorting, stock lending, and other products and services provided by the large global banking and asset management houses. Interestingly, the leverage factor employed by S&L ETPs is usually 2x or 3x the return of the index. This is an extremely low leverage compared to the leverage employed by some of the instruments listed above which can be up to 20x or more.
We believe S&L ETPs provide a valuable trading and investment tool for sophisticated investors. Some of the major features of leveraged ETPs are as follows:
- S&L ETPs trade on exchanges and settle similar to equities. Many other forms of leverage trading are considered over the counter transactions
- S&L ETP investors cannot lose more than their original investments
- S&L ETPs do not require complex documentation and systems in order to trade or invest
- S&L ETPs allow investors to hedge the long investment positions in a relatively straightforward fashion
BOOST, a WisdomTree Company, is an award winning ETP provider and one of few providers of specialised ETPs in the European market, and is the first to focus on short and leveraged ETPs. BOOST's offering targets sophisticated investors including day traders, stock brokers, wealth managers, high frequency traders and institutional investment managers.
In an effort to educate the marketplace, the BOOST ETP website offers the ‘Advisor Tool Kit’, Leverage ETF/ETP investment/trading simulator, ‘Eight things to know about S&L ETFs/ETPs fact sheet’, as well as a tutorial and exam question bank designed for advisors and investors. In addition to this there are various CPD accredited industry events.
Recently, as volatility in the markets has risen, so too has the demand for S&L ETPs. Over the past 12 months, BOOST ETP’s AUM increased 293% to $165m and monthly exchange trading volumes increased by approximately 600% to $350m (to 31 December 2014).
Hector McNeil, Co-CEO of WisdomTree Europe had this to say:
“Leverage ETPs have been in the market for almost 10 years now and provide a valuable tool for investors and advisors. There are some clear benefits for most investors that are well understood. Leverage ETPs compare very favourably to other forms of leveraged trading with its core advantages being they are exchange tradable, while an investor cannot lose more than their original investment.
“We believe S&L ETPs represent an important innovation. For certain investors these products offer a number of potential benefits, from capturing daily positive or negative returns, to cost-efficient hedging, quick market access as well as the facilitation of more sophisticated tactical trades. We welcome the evaluation of the S&L ETP structure and the mechanics, and believe such fact-based analysis will lead to a better understanding of their unique features from which investors may benefit.“
1) Boost ETP, A WisdomTree Company Short & Leverage ETFs/ETPs Global Flows Report, 30 November 2014
2) ETFGI Global ETF Report, November 2014
3) The Boston Consulting Group “Capitalizing on the Recovery” July 2013, state that global assets under management were $62.4 trillion at the end of 2012 (of total global AUM)