Interview with Oktay Kavrak, Product Strategist at Leverage Shares

The best part is that they trade like normal stocks/ETFs on regulated exchanges. No margin calls. No overnight fees. No counterparty risk.

Investor Relations Manager at RankiaPro

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So tell me about Leverage Shares.

We are a relatively new ETP issuer on the European market with disruptive products. Leverage Shares started out in 2017 with a simple goal – allow experienced investors to trade with leverage in a convenient manner. That’s how our idea for short and leveraged (S&L) ETPs on single stocks was born. 

Our products offer 2x (double leveraged), 3x (triple leveraged) and -1x (inverse) daily exposure to some of the most popular stocks in the world. These include the likes of Tesla, Apple, Amazon, NVIDIA, and others. The best part is that they trade like normal stocks/ETFs on regulated exchanges. No margin calls. No overnight fees. No counterparty risk.

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Leveraged ETPs/ETFs are a proven concept. They’ve existed on indices like the S&P 500 and commodities like gold for almost 15 years, with AUM in these products surpassing $85B in 2020. But S&L single stocks in an ETP wrapper that are physically backed? That’s a first. We are the pioneer in this category and our timing seemingly could not be better.

The trading frenzy by individual investors has caught fire this past year and the trend is here to stay. This means that investors can get exposure to these market leading stocks with a simple trade through their brokerage account. 

How was the idea born?

Our CEO, José Carlos Gonzalez, was previously a co-founder of one of the biggest thematic ETF issuers in the US – Global X. Having built that company from scratch, he learned a thing or two about what it takes to develop and idea from almost nothing to one that manages billions of dollars in assets.

A native of Spain himself, he realized there was a lot of untapped potential in the European market. As we all know, much of the continent is very compartmentalized and varies in terms of the types of products people like to trade. There are CFDs, structured products, and many other ways through which people can access leverage. However, we believe that we are bringing some cohesion to the marketplace by taking some features from all of the aforementioned and packaging it in a convenient to trade product. Our ETPs are the latest stage in the evolution of leveraged products.

What makes these ETPs more relevant in today’s market?

A: What we are seeing these past 3-5 years is a structural shift in the way that people invest and the type of people that invest. More individual investors have entered the market and the days of paying tens of euros in commissions per trade are all but over. ‘Neobrokers’ are making headlines by offering commission-free trading and even allowing investors to buy fractions of company stocks. However, they do come with a downside. Features offered by the legacy brokers are widely missing: some do not offer trading on margin, which also means investors cannot short sell stocks. 

Our products offer a solution that complements this trend as investors can trade our products like they do any other stock – the minimum to invest is 1 share. This means multiple things. They can get more exposure in response to major events or earnings releases. On the flipside, the stocks on which our ETPs are built are based on names many investors already hold in their portfolio. This translates into investors being able to hedge their positions through market downfalls (using the inverse ETPs) so they won’t get hit with the tax burden by selling.

What are some key features of these ETPs?

A: These are not pure beta products. We are talking about leveraged instruments that are rebalanced daily – meaning compounding is at play here. By definition, there is more risk involved and we try to inform potential investors with a specially-made section on our site dedicated to education. 

These are, at the end of the day, trading vehicles and not buy-and-hold products. The reason is that over longer holding periods (more than a day) – the return that investors see may not be exactly two times or three times the move on the underlying stock. That said, this could also work in favor of the investor. For example, our 2x Tesla ETP, which was issued in April 2020 was up over 2200% by year end. Tesla itself had increased about 600% during that same period. This shows you the power of compounding in trending markets.

Another key element is pricing and liquidity. This is one of the pet peeves of investors in CFDs. Since they trade over-the-counter, there’s a lack of transparency that make investors shy away from them. ETPs like ours are priced by multiple independent market makers, providing tight bid-ask spreads throughout the trading day. Our designated market maker is BNP Paribas.

How are they different than other listed products that offer leverage?

Obviously, there are various ways that people can access leverage or go short. Options and futures are powerful tools that offer similar exposures. Yet they come with operational complexities around expiration dates and futures have to be rolled over. Not to mention that you need a margin/futures account to trade them. 

There are also many types of structured products that are issued by investment banks. One of the downsides there is that they introduce an element of credit risk, meaning investors can be left holding the bag if the bank were to go under – no small feat given what we saw happen to Lehman Brothers during the financial crisis. There are also some cost structures that may not be fully transparent for the investors.

All our ETPs are physically backed by purchasing the actual stocks underlying the products. This essentially means that for $1000 invested in a 2x ETP, Leverage Shares purchases $2000 worth of the underlying stock to be held as collateral.

Anytime you trade these types of products, you really should know what you are getting into. In the case of some ‘alternatives’, fees and costs add up and you could lose even more than what you put in. The biggest benefit of our ETPs is the floor. Investors cannot lose more than what they have invested, as the lowest the ETP’s value can fall to is 0. 

Our products also have a built-in airbag mechanism in the unlikely scenario of major moves in the underlying stock. If the underlying declines more than a certain threshold, investors are cushioned because the product would then be rebalanced intraday to curtail major losses. They then resume trading as if it were a new trading day.

Portfolio construction approach: Is there a place for leveraged ETPs?

A: Like with all trading instruments, leverage is simply another tool. Investing 100% of an investor’s capital in a 2x/3x daily leveraged ETP would not be a prudent approach. The reality is that being on the wrong side of these concentrated positions could lead to quick losses. Although branded as a trading vehicle, I believe that if closely monitored, these S&L ETPs can free up some investors’ capital which they can use for further diversifying their portfolios. 

We have seen sophisticated traders use our ETPs in the satellite part of their core-satellite portfolios. This simply means that they may allocate less to a leveraged ETP on a single stock rather than parking twice or thrice the cash in the actual equity. We have also seen some institutional players use our inverse ETPs to hedge exposures to some major names. The bottom line here is that there are numerous ways to incorporate these as part of a day trading / swing trading / event-driven trading strategy. It is ultimately up to the specific investor whether they see these ETPs as a viable fit for achieving their goals. 

Final thoughts and future plans?

A: What we have right now is a showcase. It’s evident that our current suite of ETPs is very tech-heavy and this comes back to the idea of making products on names that continue to make headlines.

One thing that I believe differentiates us is the fact the we actively listen to our investors. We have seen that many from continental Europe pay rather hefty fees and FX charges when trading on foreign exchanges. Initially listed on London Stock Exchange, we recently cross-listed all of our ETPs on Euronext. This provides an added layer of simplicity as they now trade on multiple exchanges and in three currencies – EUR, USD and GBx. 

While still focusing on S&L ETPs on individual stocks, we have an aggressive pipeline for 2021. We started out with 12 ETPs, grew that to 40, and plan on expanding the range even further this year. Apart from single stocks, we are considering other asset classes as well. I can’t say too much more here – other than watch this space.

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Interview with Oktay Kavrak, Product Strategist at Leverage Shares