Short and leveraged ETP issuer, Leverage Shares, has announced that the positive yields on its range of inverse products have reached striking levels as a result of current interest rate levels and, it adds, the unique structure of its ETPs listed on London Stock Exchange, Deutsche Börse, Euronext, and Borsa Italiana.
The firm writes that “Positive yields” on inverse retail products act as a negative fee being charged, thereby providing the holder returns above and beyond the promised leverage ratio. Negative fees on ETPs are extremely rare, the firm says, adding: ‘similar inverse ETPs still charge net fees as they get their inverse exposures through swaps or similar derivatives arrangements with banks’.
The most popular product from the company’s suite of 76 inverse ETPs was the Leverage Shares -3x Short Tesla ETP, which had a turnover of USD76 million during the period and, as of 23 March 2023, offered a 10.48 per cent net ‘yield’ on an annualised basis (including all other costs and fees).
“Investors recognise that the unique physical structure of our inverse ETPs allows us to pay a return on the cash balances held in those ETPs. But what they don’t expect is the eye-popping level of such return in the current rate environment, even when accounting for the implicit borrow rates (which also increase with rates) and other costs. This compares very positively with competing inverse ETPs, which are swap-based and overlay swap fees on top of management fees,” says José Poncela, Head of Product Development at Leverage Shares.
“However, we do not advise investors to hold our ETPs just to reap this astonishing yield. Inverse ETPs are tactical instruments to be used for very short periods of time and with full appreciation of the risks implicit in leveraged products that rebalance daily. Nonetheless, investors should be aware of these cost differences across inverse products.”
Inverse ETPs allow an investor to bet on a decline in the price of a benchmark asset or security without having to buy derivatives or open a margin account, the firm explains. “They can also be used as a convenient means of hedging existing exposures. There is, however, significant market risk to ETPs as they rebalance daily.”
Leverage Shares does not use any derivatives in the structure of its inverse ETPs. Instead, the firm writes that it replicates the exposure and sells short the requisite amount of underlying instruments and holds the resulting cash balances.
“The ETPs then provide a return on such cash balance equal to the benchmark rate (for underlying US assets, Federal Funds Effective Rate) minus 1 per cent. The total impact of fees and rates on the product cost take into consideration the following items: (1) cost to borrow from prime brokers, (2) ETP management fees and (3) the return on the cash balances, where all inputs vary over time and the return on the cash balances has a greater relative impact on the overall return.”