Will Rhind, founder and CEO, GraniteShares talks to Philippa Aylmer, giving a deep-dive analysis into single stock short and leveraged ETPs
It’s no surprise that when the first leveraged funds were launched, they were an overnight sensation, says Will Rhind, Founder and CEO, GraniteShares. “They were already popular on the mutual fund side, but putting leverage in an ETF wrapper meant that they were more popular because people could actually trade the shares on a daily or intraday basis.
Founded in 2016 and with AUM of USD1.9 billion at the last count, GraniteShares itself has certainly enjoyed growth. It listed its first ETFs in the United States in 2017 – its US ETF offering consists of commodities, (including physically-backed gold) as well as income from high-yielding assets plus a US large cap index that screens out the companies likely to underperform.
The move into single stock ETPs has added growth too. In autumn 2019, GraniteShares launched a range of collateralised, short and leveraged single stock daily ETPs in Europe. Although Proshares and Direxion had previously launched leveraged ETFs in the US, the concept of leveraging single stocks was a new category in Europe and GraniteShares is the pioneer in the European market. The latest AUM for GraniteShares single stock ETPs is USD125 million (as of 9 May).
Traded through a share dealing account, investors can take both short and leveraged exposure to some of the most recognised companies listed on exchanges in the UK, US and Continental Europe – Apple, Tesla, AstraZeneca, Vodafone are just some of the 80+ stocks offered by GraniteShares, all of which track Solactive indices.
Because the stocks are accessed via the ETP wrapper, all the complexities associated with obtaining leverage are removed. Investors might use these products as a hedging tool or to magnify intraday moves or to capture long-term trends or for swing-trading: a short-term strategy, two to five days, where investors take positions in relation to an identified technical range.
While this is undoubtedly a game-changer for investors, there are limitations in the choice of stocks. Rhind explains that it is possible to do this to any stock, “but in practice you can’t. We do not want to create products that are just one-off trades or short-term fads – when we are assessing whether a product should be long or short, we have to think longer term.”
Therefore, “we are naturally going to be skewed to companies that are of a bigger size and market cap and ones that are a more enduring investment. Plus, from a derivative technology perspective it is harder to get constant leverage on smaller companies as they have a lot more volatility.”
Rhind cites the GameStop rally in 2021 as an example. “We had many enquiries asking for us to provide exposure to GameStop. On the one hand, this was technically possible but we were uncomfortable doing it because it is so volatile and it was not clear whether this would be the hot story of the moment which people would perhaps soon forget. Due to the extreme volatility in the stock, we would be in fear of constantly having to close and reopen the product.”
Confidence in collateral
There is also another factor which Rhind says is important for investors to consider, and this is in how the leverage is structured. “The business of providing leverage to customers is a huge industry across the board. Instead of accessing leverage through a prime broker, traditional margin account or CFDs and warrants, the leveraged ETF is designed to use swaps.
When it comes to guaranteeing the underlying index, rather than use a prime broker with a margin account, swaps says Rhind, are still the tried and tested institutional-grade structure.
“Whether you are talking about GraniteShares, Lyxor, DeutscheBank or Wisdom Tree, we all use them in a similar way. With this arrangement the swap provider guarantees the tracking of the underlying index and the swap exposure is fully collateralised – in our case there is a pool of collateral that sits in the account with BNYMellon – to alleviate any counterparty or credit risk. It means that the investor or portfolio manager can have confidence in the product.
“And what is important for our investors is that the product’s design tracks a mathematical formula, whereby investors are guaranteed to get that index performance which is standard in the industry. From the beginning – in terms of leverage – our structure has enabled us to do 3x long and 3x short because we have that institutional grade counterparty,” says Rhind.
Another advantage in using counterparties is when it comes to product taxation in the US. “The way we have structured our products – if the underlying is a US stock for example, the ETP is not subject to IRS Section 871(m) rule – which is a withholding tax of up to 30 per cent on dividends. If you purchase one of our US underlying ETPs such as Tesla (3LTS) for example, you do not have to fill out an IRS from W8-BEN which is also a benefit. The ETPs can also be held in tax free investment accounts in the US such as ISAs and SIPPs.”
Intraday stop loss
In terms of stop loss, GraniteShares offers what Rhind calls a Gen 2 product. “We have an intraday stoploss which is designed to kick in when the underlying stock index falls more than 50 per cent in a day.
“The idea is that when you are 3x leveraged, it is to try and stop a product going to absolute zero in a day. The theory being that when the stop loss is triggered, which would be where an underlying stock falls by 16.67 per cent (16.67 per cent*3=50 per cent). At this point the index rebalances. “The index is suspended for a 10-minute observation period for the rebalancing, then it starts again at the new index level. This is really designed to help mitigate the risk of people losing the entirety of their investment in one day in extremely volatile conditions.”
Whether it is a short or long product, the investor can never lose more than their initial investment, unlike some other traditional forms of leverage explains Rhind. “If it does get to the point where the product is worthless, it will be closed out i.e. redeemed.
“While all these products are just trading tools,” says Rhind, “whether single stock ETPs or baskets of stocks, combining leverage with the ETF wrapper delivers a far better product in terms of transparency, tradability and at a lower cost.”