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Sandeep Rao, Leverage Shares

Investors bullish on China


Sandeep Rao, a researcher at Leverage Shares, writes that the global leveraged ETF/ETP space has continued to grow in 2021. 

Data sourced from across exchanges and ETF/ETP sponsors until the end of August 2021 shows that any possible contractions caused by the pandemic in 2020 have largely been left behind, leaving this space up nearly 20 per cent in assets under management (AUM) year-on-year.

Of this, nearly 75 per cent of AUM resides within long leveraged instruments – with the remainder in inverse/inverse leveraged instruments. While the US remains the leader in Short and Leveraged (S&L) products in terms of AUM, Europe comes second in terms of the number of issuances. 

However, the Continent slightly trails behind Japan in terms of total AUM. Equities form the dominant asset class of choice across all regions.

The strong interest for leveraged products in Asia is attributed, by market commentators, to two cultural factors, firstly strong participation in market activity by retail investors historically and even more so over the past year, and secondly a large proportion of Asian investors tend to the short-term in their thinking.
As more retail investors are activated in Europe and the US, it’s not unlikely that a similar outlook could seep in as time and experience accumulates.

With respect to product classes, i.e. between ETFs, which have broad-based indices underlying them. and ETPs, which generally have a more focussed coverage, the split is quite clearly in favour of the former – which commands about 86 per cent of all AUM this year.

Our own research shows the bullish trend has been resilient in every month of the year to date, with long leveraged ETPs being overwhelmingly favoured over the inverse/leveraged inverse.

Interestingly, on a geographical breakdown of companies underlying the ETPs, i.e. the ETPs underlying Chinese companies versus those underlying companies from the rest of the world (ROW), AUM has been steadily rising in favour of the former – with Chinese ETPs occupying 18 per cent of our AUM by the end of September.

When it comes to ROW ETPs, 25 per cent of AUM by September was held in two products – the 2X Tesla and Amazon ETPs – with the rest of AUM distributed in smaller proportions across the remaining 90 ROW ETPs. On the other hand, a staggering 83 per cent of all AUM in Chinese ETPs are held in just two products – the 2X and 3X Alibaba ETPs.

Western stock markets – as well as the ETFs and ETPs underlying them – are poised to remain bullish over the course of Q4 2021. Meanwhile, for Chinese ETFs and ETPs, retail investors seem poised to capitalise on ‘buying the dip’ opportunities. Investors should remain cognisant of the shifting paradigm that was inflicted upon Chinese stocks in Q2 and Q3 2021 and do their due diligence in pursuit of undervalued opportunities in broad-based ETFs and short-term trends in single-stock ETPs.


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