Short and leveraged (S&L) ETPs have been growing in popularity since their arrival on the market nearly 15 years ago. With AUM under USD 100mn in 2005, they now represent approximately USD 80bn in assets under management as of year-end 2019. Discussed in a previous article, it’s quite evident why they have won over investors’ approval worldwide.

A key benefit of S&L ETPs is their variety. There are ETPs giving exposure to currencies, commodities, debt, and alternatives. Nevertheless, equity remains the crown jewel as approximately 85% of investments are directed towards equity indices and benchmarks¹. Hence, sophisticated investors have been able to use these methods of tactical trading to complement their traditional ‘buy and hold’ strategies.

Structure of leveraged ETPs

One discouraging attribute of leveraged ETPs until now has been their form of replication. Until recently, companies offering these products (including leveraged ETFs) have been able to achieve the needed amount of gearing via synthetic replication. This means that the ETP is not backed by the underlying asset but instead the company enters into a total return swap agreement or futures contract with a counterparty. Sometimes as little as 10% of the capital is actually invested in the equities being tracked. Although backed by collateral, this type of replication still exposes the ETP investor to additional perils as they now have exposure to both market and counterparty risk.