In the world of leveraged Exchange-Traded Products (ETPs), there are two main structures: swap-based (synthetic) and physically-backed. While most other issuers have used the former until now, Leverage Shares ETPs are unique in their physical structure.

Let’s break down the two.

Swap-Based (Synthetic) Leveraged ETPs

In this setup, the ETP doesn’t own the assets it tracks. Instead, it enters into a contract (swap agreement) with a financial institution. The institution promises to pay the ETP the return of the index it tracks.

Here are some pros and cons:

Pros:

1. Limited tracking error: Generally, has lower tracking errors and can be more cost-efficient.

2. Diverse Asset Access: Can provide exposure to a broader range of assets, including those hard to hold physically.

Cons:

1. Counterparty Risk: Introduces a risk of the other party in the contract defaulting.

2. Complexity: Can be less transparent and hence – more complex, making it slightly harder for the average investor to understand.

Let’s break down these terms to help you make informed investment decisions.

Physically-Backed Leveraged ETPs (Leverage Shares ETPs)

Here, the ETP directly holds the assets it is tracking. This means it owns the physical assets, giving a direct exposure to the assets.

Let’s dissect the pros and cons:

Pros:

Transparency: More transparent since they hold the physical assets, offering a clear understanding of the investments.

Lower Counterparty Risk: Reduced risk of the other party in an agreement defaulting, as they hold the assets physically.

Yield on Short ETPs: Inverse ETPs directly short sell the respective asset. The cash proceeds are then held in a (in the current interest rate environment) interest yielding account. These return are passed on to ETP Shareholders, meaning the all-in expense ratio is minimized.

Cons:

Limited Exposure: The range of exposures the ETP can offer is limited, especially to less liquid or more complex markets.

Summary

With over 150 ETPs listed across 4 UK/EU exchanges, Leverage Shares suite of ETPs cover multiple asset classes and leverage factors ranging from -5x to +5x.

Investors should carefully weigh the pros and cons of each structure when seeking leveraged exposure.