Exchange-traded funds (ETFs) have become increasingly popular. Instead of trying to beat the market like their actively managed counterparts, these track an index, commodity or asset. However there is one corner of this fast-growing market that hasn’t received much attention: short and leveraged (S&L) tracker funds. Short trackers enable you to bet on asset prices falling, while leveraged trackers amplify the ups and downs of the underlying index.
These are listed products that can be included in a self-invested personal pension (Sipp) or general dealing account and, unlike with spreadbetting, the most you can lose is what you initially invested. However, they could prove expensive over time. Any investment in short-term leveraged products could result in a rollercoaster ride that could see all your capital vanish.
Look before you leap
The first wave of S&L products focused on key stockmarket indices and commodities. But there is also a niche of products that track the daily price of a single stock. The three-times long products deliver three-times a stock’s daily upside and the three-times short products triple the daily decline. Normally I’d suggest investors stay away from any leveraged structure based on short-term trading – especially one involving a product that looks at daily returns. But if you think we are only halfway through a new supercycle that will benefit technology giants, leveraged long trackers could produce impressive results over time.
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GraniteShares and Leverage Shares are two of the main S&L product providers. GraniteShares has a Rolls-Royce three-times long and three-times short tracker. Rolls-Royce’s share price has been very volatile over the last 12 months. The shares rose by 17% in the year to late November, but their sharp daily ups and downs resulted in a return of -23.5% for the three-times long product. By contrast, Microsoft has seen its share price rise by 59% over the last 12 months; the three-times long tracker is up by 245%. Apple’s share price has gained 41.5%; the three-times long product 127%. Since its inception in July 2020, GraniteShares’ three-times long Tesla Daily has gained 3,087% compared with Tesla’s stock gain of 469.5%.
But it’s worth considering the cost of these products. GraniteShares’ Rolls-Royce three-times long tracker costs 0.0182% per day (6.5% per year). Leverage Shares’ three-times long Apple tracker charges an annual management fee of 0.75%, plus a margin fee: the US Federal Reserve’s overnight interest rate plus 1%.
Betting on baskets
Leverage Shares offers a much broader range of exciting tech names, including Zoom, Twitter, and Shopify. However, GraniteShares offers stock baskets, a small collection of related tech stocks where each component is equally weighted after each quarterly rebalancing.
Their FAANG daily contains Amazon, Apple, Alphabet, Facebook, and Netflix. You can buy a straight one-for-one tracker (FANG) with a total expense ratio of 0.69%, or the three-times long version (3FNG) with a charge of 0.0071% per day (2.59% per year). Over the last six months the one-for-one product is up by 19.9%, while the three-times long version has gained 65%. Granite also offers GAFAM (Alphabet, Amazon, Facebook, Apple and Microsoft) and FATANG (Facebook, Amazon, Tesla, Apple, Netflix and Alphabet).
Leverage Shares provides a simpler suite of stock trackers, which provide one-to-one exposure to big stocks at a fraction of their price. Many US tech stocks are expensive to buy 0on a regular basis, and there are also complicated US tax forms to fill out before trading. These stock trackers allow investors to buy a small fraction of US stocks easily with a UK dealing account. For most readers, a US-enabled share trading account that allows fractional shares will be an easier option, but these trackers could be useful to everyone else.
David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire.
He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com
David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space.
Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business.
David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust.
In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.
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