Short and leveraged exchange-traded products (S&L ETPs) saw significant inflows during August as market volatility drove demand for such products sharply higher.

Short and leveraged ETPs gathered $7.5bn in assets during August as market volatility drove demand for speculative trading and hedging tools.

According to ETFGI, an ETF industry consultant, S&L ETPs saw $7.5bn of net inflows during the month, equating to 36% of the total $20.8bn of ETF/ETP assets gathered across all asset classes globally. While a considerable amount of this asset growth was seen in the US, European-listed products are also attracting investors.

S&L ETPs enable investors to amplify market returns or profit from falling prices across various asset classes. Leveraged ETPs provide 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, these are also available with with a built-in leverage factor of two or three times. 

“These products are becoming increasingly popular across Europe, particularly amongst the short-term investor community. This increase is in line with the sharp volatility increase experienced at the end of August, where the volume traded in these instruments surged to reach record highs,” said Alexandre Houpert, Head of Cross Asset Retail Distribution, Europe, at Societe Generale.

Volatile market environments create a ripe picking ground for tactical investors making directional trades while also increasing the demand for risk-reduction and hedging tools which profit if the underlying asset falls in value.

“The main S&L ETPs in focus have been commodity and equity products; primarily those affected by volatility,” said Hector McNeil, Co-CEO of WisdomTree Europe, the sponsor of the Boost ETP range. “The Boost WTI Oil 3x Leverage Daily ETP (3LOI LN) has been the superstar so far and has traded on average $40m a day across Europe with AUM hitting a record $216m during the month. Other ETPs tracking leveraged and short positions in indices such as FTSE MIB, FTSE 100 and Dax have also been very popular. We have also seen strong interest in short sovereign fixed income including the Boost Gilts 10Y 3x Short Daily ETP (3GIS LN), the Boost US Treasuries 10Y 3x Short Daily ETP (3TYS LN) and the Boost Bund 10Y 3x Short Daily ETP (3BUS IM). The success generally peaked on 1st September where Boost AUM went over $500m for the first time.”

A broad range of investors are trading S&L ETPs according to McNeil: “Clients from wealth management and private banking, particularly on the advisory side, are particularly prevalent, as well as small- to mid-range institutional clients who aren’t as sophisticated in terms of systems and capability.” As ETPs trade and are treated like equities they are easily accessible and acceptable to investors: “You find clients like to use the products to hedge themselves where they can’t or are restricted from using derivatives. S&L ETPs are a derivative ‘lite’ type instrument.”

“Retail clients are also starting to use them in greater numbers as an alternative to contracts for difference (CFDs), spread bets and structured products. Clients like the on-exchange nature of ETPs versus the risks associated with over-the-counter exposures,” added McNeil.

Traditionally derivative positions, such as CFDs, have been employed to implement short and leveraged positions but ETPs are becoming the instrument of choice. Events such as the Swiss central bank’s abandonment of the franc’s peg against the euro have played no small part. The resulting surge in value of the Swiss franc caused many CFD investors to suffer significant losses and some CFD providers, such as World Spreads and Alpari, to go out of business – and their clients to lose money beyond their stop-losses. This has prompted both the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to publish warnings to retail investors about the dangers of investing in CFDs.

S&L ETPs can deliver similar geared investment outcomes to CFDs but boast a number of core advantages, principal among these being that investors cannot lose more than their original investment. Other advantages include: reduced credit risk generally and enhanced collateral protection; greater liquidity and ability trade in large sizes; no margin calls or position close-outs; and superior transparency.

The leading issuers of S&L ETPs in Europe include Societe Generale, Boost and ETF Securities who provide a range of products that track key equity indices as well as fixed income, commodities and currencies, while Lyxor, Deutsche Bank and others also offer select products.