Short and leveraged tracker funds: risky rollercoasters that could bag more bang for your buck

Short and leveraged tracker funds could help amplify your returns, says David Stevenson. But tread carefully: they can turn out to be a rollercoaster ride that could see all your capital vanish

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.

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.

Recommended

Is it OK to buy Scottish Mortgage investment trust again?
Investment trusts

Is it OK to buy Scottish Mortgage investment trust again?

Scottish Mortgage investment was hit hard by the tech-stock crash, and it is still being buffeted by headwinds. Should new investors wait for those to…
5 Jul 2022
A Europe-focused investment trust that’s back on form
Investment trusts

A Europe-focused investment trust that’s back on form

Alex Darwall’s European Opportunities investment trust deserves another look after a difficult spell, says Max King.
28 Jun 2022
The ten investment trusts with the highest dividend yields
Investment trusts

The ten investment trusts with the highest dividend yields

Investment trusts are one of the best ways to participate in the stockmarket, and the way they are structured means they can maintain their dividends …
23 Jun 2022
Three ways to cash in on the digital infrastructure boom
Share tips

Three ways to cash in on the digital infrastructure boom

Two established investment trusts and a business with great potential stand out in the digital infrastructure sector.
16 Jun 2022

Most Popular

Is inflation about to drop as recession takes hold?
UK Economy

Is inflation about to drop as recession takes hold?

Central banks are raising interest rates in an attempt to curb soaring inflation. But will that push the economy into recession? John Stepek looks at …
5 Jul 2022
Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Is it OK to buy Scottish Mortgage investment trust again?
Investment trusts

Is it OK to buy Scottish Mortgage investment trust again?

Scottish Mortgage investment was hit hard by the tech-stock crash, and it is still being buffeted by headwinds. Should new investors wait for those to…
5 Jul 2022