Volatility Drives Impact

ETPs deliver leveraged returns in the daily-compounded format. This underlines the differences in performance in the two scenarios, despite nearly-identical downturn over the highlighted periods. In the first scenario, the stock price experienced a precipitous fall over a number followed by a mild recovery. In the second scenario, the stock price fluctuated around before taking a hard dive.

As we had highlighted in an earlier article, when it comes to leveraged ETPs, “the trend is your friend”. While the strong trend in downturn enabled the composite portfolio to nearly remain at par by the end of the first scenario, the jagged price trajectory in the second scenario ensured both stock and ETP components meandered around par until the very end where the ETP component stepped in to deliver some value recovery. In both cases, value preservation was a strong theme in the total portfolio. Using ETPs as a hedging strategy – as opposed to traditional derivatives such as options and futures – might seem radical but is certainly a viable option. ETPs also generally tend to have lower costs in general when compared to derivative premiums.

Leverage Shares (the issuer whose ETPs were used to illustrate the aforementioned strategies) has recently announced that the Arranger Fee on its “Short” Tesla ETPs will drop to 0% from the end of March. The fee has been stated to remain at 0% for at least 6 months until the end of September, after which a further extension on the “fee holiday” might be considered.

While there are a number of ETP issuers in the market that offer exposure to Tesla’s performance, none of them are currently offering a fee holiday. While ETP fees typically aren’t a significant factor in most cases, the fee savings is money on the table while implementing a hedging strategy for a stock as important as Tesla.