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S&L ETPs provide alternative to CFDs and spread betting

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Short and leveraged (S&L) exchange traded products (ETPs) are an attractive alternative for contracts for difference (CFD) and spread betting investors, according to a new survey by iMarkServ and Indxx.

The survey, which was commissioned by short and leverage (S&L) ETP provider Boost ETP, considered three main themes: the insights and habits of CFD and spread betting users; their attitudes towards risks and returns; and finally the areas where they think CFDs and spread betting need to be improved.

According to BOOST, S&L ETPs already have many of the features that investors feel are lacking in CFDs and spread bets, as well as addressing many of the regulatory, counterparty risk and other concerns that CFD and spread bet users have in relation to their current trading arrangements.
 
The main findings of the research are:
 
• 72% of respondents trade ETFs as well as spread betting and CFDs
• 66% trade the FTSE100 index and 62% trade single stocks
• High leverage (69%) and the ability to go short (also 69%) were seen as the main attraction of CFDs and spread betting. 54% also cited tax advantages as a benefit
• 65% trade with the top three providers, showing a lack of effective choice for investors
• 83% of equity focused trading was between 2x and 5x leverage. For commodities and fixed income the equivalent figures were 76% and 64% respectively
• 62% believe that margin calls, losing more than their initial investment and being closed out are all major risks to them
 
Based on these factors, short and leveraged ETPs are an attractive alternative. CFD and spread bet investors are already used to trading ETFs. Investments with some, but not excessive, leverage suit them well, as does the ability to go short.
 
Attitudes to risks and returns:

• When considering provider risks, 40% had concerns regarding the finances of providers, understandable given recent bankruptcies of major firms such as MF Global and WorldSpreads. Respondents also cited liquidity, client money risks and poor spreads (15% each) as concerns they had regarding their providers
• Most respondents (86%) are aware that most investors lose money when trading spread bets and CFDs
• 40% of respondents are concerned that spread betting and CFD providers operate hedged and unhedged books. However, 71% were unsure whether their provider operated this way
 
With ETPs, all investors are treated equally. ETPs are generally over collateralised and/or physically replicated, with investors therefore being insulated from the financial risks of providers and not being subject to client/firm money segregation risks.
 
Areas needing improvement:

• All respondents said they would rather trade on a regulated market; 95% prefer a product that mitigates their counterparty risk; 91% prefer to trade on an official exchange. The OTC nature of CFD and spread betting appears to be unsatisfactory for investors

• 95% said they would prefer to trade with multiple market makers; ‘betting against the house’ also seems unsatisfactory

• Where trading on a leveraged or short basis, 86% of respondents would prefer to use a product where they cannot lose more than their original investment

• Trading without the risk of margin calls, and without the risk of being ‘knocked out’ of the market in a severe fall, were both also highly desired features (77% in each case)

• 90% of respondents preferred a product where they could offset capital losses for tax purposes against their broader investment portfolio, understandable given that most investors lose money on CFDs and spread betting

• 91% also wanted the ability to use tax wrappers such as ISAs and SIPPs which is standard for ETPs but limited for CFDs and prohibited for spread bets
 
Hector McNeil, Co-CEO of WisdomTree Europe, says: "The iMarkserv and Indxx research clearly shows that UK investors have an appetite for leverage trading across a wide variety of asset classes in the UK. The CFD and spread betting market has led the way in providing leverage trading facilities to active traders. However, investors clearly understand that these products come with risks and they are looking for solutions. Investors are uncomfortable with the risks of over the counter products, and ETPs can help. The survey shows overwhelming support for a product that offers exchange listings, Crest settlement, multiple market makers and counterparty risk mitigation. A frequently cited advantage of spread betting is the tax free nature of any gains, but actually most investors want a tax offset for capital losses, which spread betting doesn’t give.
 
“What is clear is that all the issues and improvements highlighted by the respondents point towards short and leverage ETPs, which mitigate those issues and include those improvements. However, investor awareness of ETPs and their benefits is still relatively low. Boost, as the sole European ETP provider focused on S&L ETPs, will be at the forefront of educating UK investors on these positive features.
 
“CFDs and spread betting date back to the 1990’s, and since then they have not kept pace with the increasing demands of investors. In fact, that is why short and leveraged ETPs were first created, they were launched in 2005 to address many of the negative issues that investors were finding.”
 

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