Leveraged ETF's
Discussion
Leverage has a time and a place. The problem with leverage is that people will generally use it at the wrong time and the wrong place which is exactly why most leveraged activity is B booked and at best only ever partially hedged.
What is important is to fully understand how the ETF issuer generates the leverage as different methods will have different costs and also different market reactions.
What is important is to fully understand how the ETF issuer generates the leverage as different methods will have different costs and also different market reactions.
It’s definitely an interesting subject (well, it’s probably in reality desperately not but it’s my business and I enjoy it 
).
We are happy to gear up on our homes 5x, we’ll gear up 100% on cars, kitchen appliances, toilet roll. The average Briton is geared to the absolute wingwang in whatever direction they look and with nothing in the way of savingsnor credible wealth underpinning any of it. For most people their only wealth lies in the leveraged position they have on their house which could all be wiped out and more in a single change of market sentiment.
So with that in mind, why do we suddenly have a fear over a leveraged ETF? In reality it seems like madness to be leveraged up to the eyeballs in every direction but suddenly be a bit prudish about going just 2x geared on a stable, well managed investment fund.
If we look at this more practically then younger investors are supposed to invest more of their capital in higher risk markets. That’s always been the traditional view. Now that has historically been done by investing that money in small caps and third world economies (hyperbolic for effect
) but they could achieve the same level of risk by instead just investing in the FTSE100 but with a bit of leverage.
What’s ultimately better? Unleveraged mid cap, developing market stocks or a basket of blue chips with a bit of leverage?
There is also the aspect that a young person saving up a deposit for a home is going to gear that home 5-10x. Does it therefor seem rational or irrational to gear their savings by 2x?
Or in another scenario, which is lower risk, investing ones savings in a minibond that offers 10% returns but carries a rather high risk of total loss and with no access to your investment which is not covered by the FSCC or investing in a leveraged ETF through a regulated and FSCS broker with access whenever you want?
I know very little about the structure of leveraged ETFs but for quite a few years I’ve been offering low leverage ETFs to my clients via CFDs and spreadbets and clients have been using them for investment purposes.
). We are happy to gear up on our homes 5x, we’ll gear up 100% on cars, kitchen appliances, toilet roll. The average Briton is geared to the absolute wingwang in whatever direction they look and with nothing in the way of savingsnor credible wealth underpinning any of it. For most people their only wealth lies in the leveraged position they have on their house which could all be wiped out and more in a single change of market sentiment.
So with that in mind, why do we suddenly have a fear over a leveraged ETF? In reality it seems like madness to be leveraged up to the eyeballs in every direction but suddenly be a bit prudish about going just 2x geared on a stable, well managed investment fund.
If we look at this more practically then younger investors are supposed to invest more of their capital in higher risk markets. That’s always been the traditional view. Now that has historically been done by investing that money in small caps and third world economies (hyperbolic for effect
) but they could achieve the same level of risk by instead just investing in the FTSE100 but with a bit of leverage. What’s ultimately better? Unleveraged mid cap, developing market stocks or a basket of blue chips with a bit of leverage?
There is also the aspect that a young person saving up a deposit for a home is going to gear that home 5-10x. Does it therefor seem rational or irrational to gear their savings by 2x?
Or in another scenario, which is lower risk, investing ones savings in a minibond that offers 10% returns but carries a rather high risk of total loss and with no access to your investment which is not covered by the FSCC or investing in a leveraged ETF through a regulated and FSCS broker with access whenever you want?
I know very little about the structure of leveraged ETFs but for quite a few years I’ve been offering low leverage ETFs to my clients via CFDs and spreadbets and clients have been using them for investment purposes.
Why? Because when someone borrows £2k to buy some rusty diesel, they know that's all they have at stake. When they leverage to trade, all they're thinking about is how they'll be a millionaire by next week as they're making £100 per tick. They're not thinking about how the market could drop 50 points leaving them owing £5k that they don't have in their bank account.
Hoofy said:
Why? Because when someone borrows £2k to buy some rusty diesel, they know that's all they have at stake. When they leverage to trade, all they're thinking about is how they'll be a millionaire by next week as they're making £100 per tick. They're not thinking about how the market could drop 50 points leaving them owing £5k that they don't have in their bank account.
Didn't that happen to someone on here?They'd only done it because they'd lost money on Bitcoin IIRC.
Hoofy said:
Why? Because when someone borrows £2k to buy some rusty diesel, they know that's all they have at stake. When they leverage to trade, all they're thinking about is how they'll be a millionaire by next week as they're making £100 per tick. They're not thinking about how the market could drop 50 points leaving them owing £5k that they don't have in their bank account.
Absolutely but that is trading/gambling. What I’m referring to is investing. If someone is using a leveraged ETF to trade then they are arguably a bit soft in the head as it’s like turning at for your F1 race in a Punto.
Most traders are just gamblers which is why the gamblers’ rules of winning tend to apply. There’s nothing wrong in that, gambling is a liesure activity etc but I wouldn’t think that leveraged ETFs were aimed at gamblers but investors who look to use the market for positive returns and prudent wealth creation rather than a bit of fun betting on whether the FTSE will be up or down today.
So is there a place for leverage in an investment? I think that’s the key here. Personally, I think that there is but the investor needs to fully understand what that leverage is and therefor what the risks are etc.
b
hstewie said:
hstewie said:Hoofy said:
Why? Because when someone borrows £2k to buy some rusty diesel, they know that's all they have at stake. When they leverage to trade, all they're thinking about is how they'll be a millionaire by next week as they're making £100 per tick. They're not thinking about how the market could drop 50 points leaving them owing £5k that they don't have in their bank account.
Didn't that happen to someone on here?They'd only done it because they'd lost money on Bitcoin IIRC.
DonkeyApple said:
Hoofy said:
Why? Because when someone borrows £2k to buy some rusty diesel, they know that's all they have at stake. When they leverage to trade, all they're thinking about is how they'll be a millionaire by next week as they're making £100 per tick. They're not thinking about how the market could drop 50 points leaving them owing £5k that they don't have in their bank account.
Absolutely but that is trading/gambling. What I’m referring to is investing. If someone is using a leveraged ETF to trade then they are arguably a bit soft in the head as it’s like turning at for your F1 race in a Punto.
Most traders are just gamblers which is why the gamblers’ rules of winning tend to apply. There’s nothing wrong in that, gambling is a liesure activity etc but I wouldn’t think that leveraged ETFs were aimed at gamblers but investors who look to use the market for positive returns and prudent wealth creation rather than a bit of fun betting on whether the FTSE will be up or down today.
So is there a place for leverage in an investment? I think that’s the key here. Personally, I think that there is but the investor needs to fully understand what that leverage is and therefor what the risks are etc.
Hoofy said:
But wouldn't the average punter going into leveraged ETFs have the same mindset but just drop the word "investment" every now and then to make it sound like a dead cert and to differentiate themselves from a punter in Paddy Power when the mindset is probably the same.
If that is the initial mindset then I think that’s absolutely the likely end result. Ultimately the leveraged ETF looks to be a really clumsy way to replicate a simple CFD. A bit like coverered warrants/turbos are. Poor spreads, seemingly masked funding costs and other factors etc.
I wonder if the product is really aimed at US investors rather than UK ones where we have access to cleaner and more transparent products?
I think the cleaner product is a CFD on the true underlying where the consumer agrees the amount of leverage.
DonkeyApple said:
Hoofy said:
But wouldn't the average punter going into leveraged ETFs have the same mindset but just drop the word "investment" every now and then to make it sound like a dead cert and to differentiate themselves from a punter in Paddy Power when the mindset is probably the same.
If that is the initial mindset then I think that’s absolutely the likely end result. Ultimately the leveraged ETF looks to be a really clumsy way to replicate a simple CFD. A bit like coverered warrants/turbos are. Poor spreads, seemingly masked funding costs and other factors etc.
I wonder if the product is really aimed at US investors rather than UK ones where we have access to cleaner and more transparent products?
I think the cleaner product is a CFD on the true underlying where the consumer agrees the amount of leverage.
Hoofy said:
I'm sure you're right. I think businesses like to create more products to get the consumer to hand over more money, though.
That’s a disgraceful view! They do seem to be a clumsy way to offer leverage to US consumers who are banned from CFDs.
https://www.fidelity.com/learning-center/investmen...
Remarkably coy about the funding charges which always leads me to suspect that a charge is chunky.
DonkeyApple said:
Hoofy said:
I'm sure you're right. I think businesses like to create more products to get the consumer to hand over more money, though.
That’s a disgraceful view! They do seem to be a clumsy way to offer leverage to US consumers who are banned from CFDs.
https://www.fidelity.com/learning-center/investmen...
Remarkably coy about the funding charges which always leads me to suspect that a charge is chunky.
DonkeyApple said:
It’s definitely an interesting subject (well, it’s probably in reality desperately not but it’s my business and I enjoy it ).
We are happy to gear up on our homes 5x, we’ll gear up 100% on cars, kitchen appliances, toilet roll. The average Briton is geared to the absolute wingwang in whatever direction they look and with nothing in the way of savingsnor credible wealth underpinning any of it. For most people their only wealth lies in the leveraged position they have on their house which could all be wiped out and more in a single change of market sentiment.
So with that in mind, why do we suddenly have a fear over a leveraged ETF? In reality it seems like madness to be leveraged up to the eyeballs in every direction but suddenly be a bit prudish about going just 2x geared on a stable, well managed investment fund.
If we look at this more practically then younger investors are supposed to invest more of their capital in higher risk markets. That’s always been the traditional view. Now that has historically been done by investing that money in small caps and third world economies (hyperbolic for effect) but they could achieve the same level of risk by instead just investing in the FTSE100 but with a bit of leverage.
What’s ultimately better? Unleveraged mid cap, developing market stocks or a basket of blue chips with a bit of leverage?
There is also the aspect that a young person saving up a deposit for a home is going to gear that home 5-10x. Does it therefor seem rational or irrational to gear their savings by 2x?
Or in another scenario, which is lower risk, investing ones savings in a minibond that offers 10% returns but carries a rather high risk of total loss and with no access to your investment which is not covered by the FSCC or investing in a leveraged ETF through a regulated and FSCS broker with access whenever you want?
I know very little about the structure of leveraged ETFs but for quite a few years I’ve been offering low leverage ETFs to my clients via CFDs and spreadbets and clients have been using them for investment purposes.
Bearing in mind the typical investor will be very, very uncomfortable with an unleveraged 100% global equities, accepting more volatility than this surely can't be a rational decision for the vast majority of people. For those with very aggressive objectives, maybe retiring later and/or on less and/or saving more (or whatever the objective is if not retirement) must surely be a better choice?). We are happy to gear up on our homes 5x, we’ll gear up 100% on cars, kitchen appliances, toilet roll. The average Briton is geared to the absolute wingwang in whatever direction they look and with nothing in the way of savingsnor credible wealth underpinning any of it. For most people their only wealth lies in the leveraged position they have on their house which could all be wiped out and more in a single change of market sentiment.
So with that in mind, why do we suddenly have a fear over a leveraged ETF? In reality it seems like madness to be leveraged up to the eyeballs in every direction but suddenly be a bit prudish about going just 2x geared on a stable, well managed investment fund.
If we look at this more practically then younger investors are supposed to invest more of their capital in higher risk markets. That’s always been the traditional view. Now that has historically been done by investing that money in small caps and third world economies (hyperbolic for effect
) but they could achieve the same level of risk by instead just investing in the FTSE100 but with a bit of leverage. What’s ultimately better? Unleveraged mid cap, developing market stocks or a basket of blue chips with a bit of leverage?
There is also the aspect that a young person saving up a deposit for a home is going to gear that home 5-10x. Does it therefor seem rational or irrational to gear their savings by 2x?
Or in another scenario, which is lower risk, investing ones savings in a minibond that offers 10% returns but carries a rather high risk of total loss and with no access to your investment which is not covered by the FSCC or investing in a leveraged ETF through a regulated and FSCS broker with access whenever you want?
I know very little about the structure of leveraged ETFs but for quite a few years I’ve been offering low leverage ETFs to my clients via CFDs and spreadbets and clients have been using them for investment purposes.
Derek Chevalier said:
Bearing in mind the typical investor will be very, very uncomfortable with an unleveraged 100% global equities, accepting more volatility than this surely can't be a rational decision for the vast majority of people. For those with very aggressive objectives, maybe retiring later and/or on less and/or saving more (or whatever the objective is if not retirement) must surely be a better choice?
I agree. I would think that working for a few more years, saving more or retiring on less would be hard to argue against as the most prudent solution. But when you have a client who wants to invest a portion of their money into high risk what are the sort of options available? Typically investors are steered towards emerging markets but it would be interesting to consider how or whether the FTSE iShare with 10 or 20% leverage would compare as an alternative? If the two had identical volatility and comparable costs would the general stability of underlying blue chips come through?
It would be interesting to look at how something like TEM.L would compare to CUKX.L with say 10% leverage.
My (amateur) thoughts are if you are going to invest in a tracker for 30 odd years (im in my twenties) why not do it in a leveraged fund to multiply the potential gains. However the more i have read about them the more i hear 'you should only hold them for days at a time' or avoid unless you are warren buffet. Like has been mentioned the world seems perfectly happy leveraging a depreciating assest but runs a mile from a potentially appreciating asset.
Edited by FastNLoud on Thursday 18th April 19:13
FastNLoud said:
My (amateur) thoughts are if you are going to invest in a tracker for 30 odd years (im in my twenties) why not do it in a leveraged fund to multiply the potential gains. However the more i have read about them thr more i hear 'you should only hold them for days at a time' or avoid unless you are warren buffet. Like has been mentioned the world seems perfectly happy leveraging a depreciating assest but runs a mile from a potentially appreciating asset.
It depends on how much you leverage. I don't know the details but if you're doing £10 a point and it drops 500 points for a few years then that's quite a small amount (-£5k). If you go a bit crazy and don't have that much to your name, but do £500 a point, could you sit with that paper loss?FastNLoud said:
My (amateur) thoughts are if you are going to invest in a tracker for 30 odd years (im in my twenties) why not do it in a leveraged fund to multiply the potential gains. However the more i have read about them the more i hear 'you should only hold them for days at a time' or avoid unless you are warren buffet. Like has been mentioned the world seems perfectly happy leveraging a depreciating assest but runs a mile from a potentially appreciating asset.
Cost of funding the debt element is the element that must be considered. Edited by FastNLoud on Thursday 18th April 19:13
For example, typical funding at present is around 5% on the borrowed amount. At the same time the FTSE currently yields 4-5%.
Obviously, the more you leverage then the more your debt costs rise, same as with a BTL for example. And just like a BTL the yield attributed to the borrowed amount may well not cover the debt costs.
So if you chuck 100k into the FTSE and add another 10k of borrowed capital then at the moment you’ll roughly get the just the yield of the 100k but the capital uplift or downside of 110k.
The key is arriving at the suitable level of leverage. 10-20% and the risk increase is marginal and over time the capital performance should be much greater. Much more than that and I think the volatility it would create and the funding costs would not make it a good investment over the long term.
Gassing Station | Finance | Top of Page | What's New | My Stuff