Market turmoil creates opportunities for short and leveraged ETP investors

Aug 24th, 2015 | By | Category: Alternatives / Multi-Asset

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The devaluation of the yuan and concerns about the health of Chinese economy, the world’s second largest, have prompted a severe correction in global markets. Whilst the turmoil has created headaches for most investors, it has brought about some highly profitable trading opportunities for investors in short and leveraged exchange-traded products. Among the biggest beneficiaries of the market rout have been short ETPs linked to equities, oil and industrial metals and leveraged long ETPs linked to volatility and gold, all of which have posted bumper returns.

Short ETPs boom after yuan devaluation

The market turmoil stemming from China has led to bumper returns for some short and leveraged ETPs.

As their names suggest, leveraged ETPs provide long exposure to a reference index with a leverage factor built-in, typically in the order of two or three times, while short ETPs provide investors with the inverse performance of a reference index, also typically with a built-in leverage factor of two or three times. These products enable investors to amplify market returns and profit from falling markets.

Industrial and Precious Metals

The prospect of weakened demand from China, one of the world’s largest consumers of industrial metals, has affected these commodity markets considerably. The prices of all industrial metals except for tin declined over the last month. Perhaps most indicative of the slowdown in China is the decline in copper prices. Copper’s wide range of industrial applications due to its excellent properties as a conductor of heat and electricity (it is used extensively in home-building and the construction of industrial machinery and automobile parts), make it a reliable gauge of general economic expansion. The price of the metal has fallen to lows not seen for over six years. This has led to significant gains in leveraged short ETPs tracking copper, such as the Boost Copper 3x Short Daily ETP (3HCS LN) which is up 17.8% in the past month and 91.4% over the past three.

Aluminium is another metal that boasts wide industrial applications, especially in the construction of automobiles and industrial machinery. Prices have generally been in decline for several years, with stronger downward trends registered since May of this year, paving the way for gains through short ETP offerings. The ETFS Daily Short Aluminium ETP (SALU LN) is up 10.9% in the past month and 24.7% over the past three.

On the flip side is gold. This precious metal is a seen by many investors as a safe haven and sanctuary for capital during times of market volatility. Leveraged long gold ETPs have therefore delivered some sparking shiny returns. The Boost Gold 3x Leverage Daily ETP (3GOL LN) is up 17.5% in the past month.

Oil

Oil prices have been hammered recently as traders priced in lower global demand amid a continual supply glut resulting from unprecedented OPEC production, a boom in the US shale industry and progress towards the opening up of Iranian oil supplies to global markets. The risk around China has added yet further downward pressure to the price of black gold, with US crude oil contracts trading in New York dipping below $40 a barrel. Short ETPs have understandably been among the best ETP performers, with the Boost WTI Oil 3x Short Daily ETP (3SOI LN) up 81.2% in the past month and a whopping 214.0% over the past three.

Equities

More than $5tn has been wiped off global stock markets since China devalued the yuan a fortnight ago. European equity markets have been affected due to the international presence many of the constituents hold, especially in the slowing Asia region. Officially, these markets are in “correction” territory but are bordering on being classified as “bear markets” should the fall continue. Last week, the FTSE 100 dropped 5% and was down by a similar amount on Monday, while France’s CAC 40 and Germany’s DAX lost around 7% and also fared very badly on Monday. Those investors who held positions in leveraged short ETPs tracking these European indices have naturally benefited.

Over the past month, the Boost FTSE 100 3x Short Daily ETP (3UKS LN) has gained 28.4%, the Boost Short DAX 3x Daily ETP (3DES LN) 52.6% and the Boost EURO STOXX 50 3x Short Daily ETP (3EUS LN) gained 32.14%.

US equities have also been hit with the Boost US S&P500 3x Short Daily ETP (3USS LN) and the Boost US NASDAQ 100 3X Short Daily ETP (QQQS LN) generating monthly returns of 34.1% and 44% respectively.

Some investors recorded significant gains by backing ETPs that were long volatility indices, such as the VIX ‘fear index’. One of the largest products in this space is the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), which tracks the S&P 500 VIX Short-Term Futures Index Excess Return (200%). This Nasdaq-listed ETN is up 97.5% over the month to 24th August.

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