How to use exchange-traded products to profit from market turbulence

Towards the end of last year, I wrote about short and leveraged index trackers. These exchange traded products (ETPs) allow you to track an index with upside and downside leverage, usually up to three times the daily return.

The word “daily” is very important here – the way that daily leveraged and short returns compound means that market volatility can eat into your returns much more than you’d expect. For example, markets can end up flat over one month, yet be so volatile day-to-day that such an ETP loses a significant amount of money.

So these products come with a health warning, but I highlighted them because I felt investors were underestimating their usefulness over the short- to medium-term. A three-times daily returns long product could produce geared upside profits in a trending bullish market.

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Betting against Cathie Wood

We’re not in a trending bullish market at the moment, but these leveraged ETPs are still proving useful to profit from falling share prices. GraniteShares has seen a 166% rise in trading in its range of short ETPs on popular stocks (such as Tesla and NIO) amid the recent market sell-off.

Another string of short ETPs has caught my attention this week. This bunch is from Leverage Shares and tracks what was, until this year, an insanely popular range of exchange traded funds (ETFs) from ARK Invest in the US, managed by Cathie Wood.

Wood is the public face of the turbocharged tech disruption bull community in the US. Her actively managed ETFs have proved a huge hit and she’s riffed on her theme of tech disruption by launching distinct strategies based on tech innovation, genomics, autonomous tech, and robotics and fintech. She will focus on to a big trend and then find the most interesting stocks, many of which are mid- to small cap.

When the market is buoyant Wood is queen of the hill, but when markets turn dismal, her ETFs plunge. At the moment, she’s having a very tough time. Now Leverage Shares has launched a range of ETPs that allow you to track three of her most successful US funds directly: the Innovation ETF, the Next Generation Internet ETF and the Genomics Revolution ETF.

Investors in the UK aren’t able to buy most US-listed ETFs, so what these do is mirror the US portfolios within a UK tracker fund – but with a twist. In each of these strategies you can either track the underlying ETF one for one, or leverage returns three times on the upside and three times on the downside. The smart money has been in the short three-times leveraged version. The three-times short ARKK Innovation product from Leverage Shares is up a staggering 138% this year, while the year-to-date return on the original ETF is down 23%.

The contrarian in me wonders whether most of the tech sell-off is priced in, which could mean speculators turn to the three-times leveraged long version. Alternatively, I can see the appeal of the one-for-one tracker for British investors to get access to Wood’s ETFs. If you want a Scottish Mortgage disruption strategy on steroids, ARK Invest is worth a look.

Trading Berkshire Hathaway

These new products from Leverage Shares came out in December, alongside another range that tracks Berkshire Hathaway’s shares. Warren Buffett’s investment company is the polar opposite of ARK – it’s value oriented and prioritises dependable cash flow.

You can buy US-listed Berkshire Hathaway shares easily (the famous Class A shares are around $480,000 each, but the class B shares are around $320). So the direct one-for-one tracker, which simply holds the underlying Class B stock with no swaps or derivatives, may not be that useful. Still, the firm also offers a two-times long or short tracker, although quite why you’d want to do that with a boring stock such as Berkshire Hathaway is beyond me.