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FAQs for ETCs
- Who is ETF Securities (ETFS)?
- What are Exchange Traded Commodities (ETCs)?
- Are ETCs very similar to Exchange Traded Funds (ETFs)?
- How do I buy and sell an ETC?
- Who is the Issuer?
- How are ETCs priced and where is the information published?
- Who calculates the underlying DJ-UBSCISM commodity indices, and where is the information published?
- Do ETCs track the underlying commodity price?
- Do ETCs make interest payments?
- Why are some ETCs priced off futures and some priced directly off physical metals?
- How can you guarantee the tracking error remains minimal?
- How is liquidity provided?
- What would happen if ETF Securities were to go bankrupt?
- What is the credit risk of the different ETCs?
- Are ETCs eligible investments for ISAs or SIPPs?
- Are there any other costs besides Management Fees?
- My broker indicated she/he cannot buy the product because it is in USD. What can I do?
- Can investors lose money?
- Are ETCs subject to Stamp Duty or Stamp Duty Reserve Tax?
- Are there other tax considerations for investors?
- What is the difference between ETCs and certificates or turbos?
- Why have ETF Securities introduced new ETCs that offer exposure to different maturities (i.e. ETFS Brent 1yr, ETFS Forward Agriculture)?
- Are ETCs covered by the FSA compensation scheme?
- Who regulates ETF Securities and ETCs?
- Can I take physical delivery of my bullion?
- Has the cessation of the Lyxor marketing agreement had any impact to the structure of Gold Bullion Securities?
- Who audits the metal bars for physically-backed ETCs?
- What is the difference between ETFS Physical Gold and Gold Bullion Securities?
FAQs for Oil ETCs
- I have recently purchased an oil ETC and have noticed that it does not always track the oil price. Why?
- Why can't Oil ETCs just track the oil price?
- Can ETFS Crude Oil outperform the oil "spot" price?
- What is the DJ-UBS Crude Oil Sub-IndexSM?
- Why does an oil ETC return differ from the return of the front month oil future contract I see on Bloomberg/Reuters?
FAQs for Short/ Leveraged ETCs
- Can I lose more than my initial investment while investing in Short/ Leveraged ETCs?
- The Index which the Short/ Leveraged ETC is tracking has moved by 'X' % over the past week but my Short / Leveraged ETC has moved 'Y'%. Why doesn't the ETC track the exact movement of the Index?
- Do I have to invest more collateral (as margin) if the index moves against me?
- Do I need to borrow stock to buy a Short ETC?
FAQs for ETFs
- Who is ETF Securities (ETFS)?
- What is ETF Exchange?
- What are Exchange Traded Funds (ETFs)?
- How do I buy and sell an ETF?
- Who is the Issuer?
- How are ETFs priced and where is the information published?
- Do ETFs make dividend payments?
- How can you ensure the tracking error remains minimal?
- How is liquidity provided?
- What is the credit risk for investors?
- What would happen if ETF Securities were to go bankrupt?
- Are ETFs eligible investments for ISAs, SIPPs and CTFs?
- Are there any other costs besides Management Fees?
- Can investors lose money?
- Are ETFs subject to Stamp Duty or Stamp Duty Reserve Tax?
- Do ETFs hold UK distributor status?
- Are there other tax considerations for investors?
- What is the difference between ETFs and traditional index tracking funds?
- Are ETFs covered by the FSA compensation scheme?
- Who regulates ETF Securities and ETFs?
FAQs for ETFs tracking 2x Short/ 2x Leveraged equity indices
- Can I lose more than my initial investment while investing in an ETF a tracking Short/ Leveraged equity indices?
- The return from the ETF tracking the leveraged/short index is different from 2x or minus 2x the long index return over the last week or month? Why doesn't the ETC track the exact movement of the long index?
- How can daily rebalancing affect the performance of 2x leveraged equity indices?
- How can daily rebalancing and volatility affect the performance of 2x short equity indices?
- Do I have to invest more collateral (as margin) if the index moves against me?
- Do I need to borrow stock to buy a Short ETC?
- Are ETFs tracking Short/Leveraged equity indices suitable for buy & hold investing?
- Where can I get information on the short/leveraged equity indices?
FAQs for ETCs
1. Who is ETF Securities (ETFS)?
ETF Securities is the pioneer and leader in Exchange Traded Commodities (ETCs). The management of ETF Securities Limited created the world's first ETC in 2003 - Gold Bullion Securities in Australia and London which now has approximately US$2 billion in assets. In 2005, ETF Securities created the world's first oil ETC and then in 2006 ETF Securities created the world's first ETC platform on the London Stock Exchange, making available 19 commodities and 10 indices. In 2007, ETF Securities created the world's first physically backed precious metals ETC platform, making available platinum and palladium for the first time ever.
Now investors can trade all the world's major commodities on the same exchange and in the same time zone.
2. What are Exchange Traded Commodities (ETCs)?
ETCs are simple and transparent open-ended securities which trade on regulated exchanges. ETCs enable investors to gain exposure to commodities without trading futures or taking physical delivery. ETFS-branded ETCs are secured, undated, zero coupon notes that are designed to accurately track the underlying commodity index or individual commodity.
3. Are ETCs very similar to Exchange Traded Funds (ETFs)?
ETCs are very similar to ETFs because they are both open-ended, continuously traded and have multiple market makers. The main difference is that ETCs use a secured, undated, zero coupon note structure, whereas ETFs typically use a fund structure.
4. How do I buy and sell an ETC?
Investors can buy and sell ETCs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts.
5. Who is the Issuer?
The Issuers are special purpose vehicles (SPVs) created to issue ETCs: ETFS Oil Securities Limited is the Issuer for 9 Oil Securities, ETFS Commodity Securities Limited is the Issuer for over 100 ETFS Commodity Securities, ETFS Metal Securities Limited is the issuer of 5 physically backed precious metal ETCs and Gold Bullion Securities is the issuer of 1 physically backed gold ETC. The assets of each Issuer and class of security are ring-fenced for investor protection. The Issuers are administered by ETF Securities Limited.
6. How are ETCs priced and where is the information published?
ETFS Oil Securities are priced directly off oil futures, and the specific formula is available in the Prospectus. ETFS Commodity Securities are priced directly off the underlying DJ-UBS Commodity IndexSM sub-indices. ETFS Metal Securities are priced directly off the spot price of the four relevant precious metals. Detailed pricing is available for all securities on the ETF Securities website.
7. Who calculates the underlying DJ-UBSCISM commodity indices, and where is the information published?
Dow Jones and UBS calculate the DJ-UBS Commodity IndexSMand sub-indices each trading day based on the relevant closing/settlement price(s) published by Dow Jones (at www.djindexes.com) and distributed through many data distributors, including Bloomberg and Reuters.
8. Do ETCs track the underlying commodity price?
ETCs priced off futures are almost 100% correlated with the underlying commodity price, however the spot price return is not an investable return. ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures markets.
ETCs which are physically backed are priced directly off the metal spot price and therefore returns are 100% correlated to the underlying price. These ETCs track the precious metals price less fees.
9. Do ETCs make interest payments?
ETFS Oil Securities and ETFS Commodity Securities are total return securities, and as such earn a collateral yield (interest rate) that is capitalised into the price of the security. No dividends are paid. ETFS (physical) Metal Securities pay no interest or dividends.
10. Why are some ETCs priced off futures and some priced directly off physical metals?
Some ETCs (ETFS Oil Securities and ETFS Commodity Securities) are priced off futures as it is not possible to store - for long periods - some physical commodities. In addition, futures pricing can be more liquid and efficient for some commodities, especially where the futures contract helps to standardize the pricing - for example, agricultural commodities where quality can vary between crops, seasons and regions. In the case of our ETFS (physical) Metal Securities, precious metals are homogenous, can be stored easily and do not decay, and therefore can be priced directly off the underlying physical commodity.
11. How can you guarantee the tracking error remains minimal?
Similar to ETFs, ETCs are open-ended securities, and therefore Authorised Participants (who are generally investment banks with commodities expertise) can create or redeem ETCs at their underlying value or NAV.
12. How is liquidity provided?
ETCs are open-ended, therefore new ETCs can be created by Authorised Participants according to demand. Therefore, the liquidity of ETCs reflects the liquidity of the relevant underlying commodity market(s).
13. What would happen if ETF Securities were to go bankrupt?
If ETF Securities were to go bankrupt, this would not affect the value of the ETCs. Each ETC is issued by a Special Purpose Vehicle whose assets are ring-fenced for investor's safety and the activities for each Issuer are monitored by an independent Trustee. ETF Securities does not hold any investor money at any time.
14. What is the credit risk of the different ETCs?
A number of different SPVs have been set up to issue different ETCs depending on the objective and its counter-parties.
- ETFS (physical) Metal Securities Ltd. - all bullion is held in allocated London good Delivery bars by the custodian, HSBC. In the event HSBC were to go bankrupt, the Issuer (and Trustee) would take control of the metal. In the event that ETF Securities were to go bankrupt then the Trustee and an Administrator would take control of the allocated metal which should have no effect on the value of the ETCs since the Issuer is ring-fenced from ETF Securities. Click here to view the counterparty risk factsheet for physically-backed ETCs.
- Gold Bullion Securities Ltd. - all bullion is held in allocated London good Delivery bars by the custodian, HSBC. In the event HSBC were to go bankrupt, the Issuer (and Trustee) would take control of the gold bullion. In the event that ETF Securities were to go bankrupt then the Trustee and an Administrator would take control of the allocated metal which should have no effect on the value of the ETCs since the Issuer is ring-fenced from ETF Securities. Click here to view the counterparty risk factsheet for physically-backed ETCs.
- ETS Commodity Securities Ltd. - the commodities exposure is outsourced to credit worthy companies who are leaders in the respective field. The total daily mark to market value of the commodity exposure is 100% collateralised. BNY Mellon is the collateral manager. In the event the Commodity Counterparty was to go bankrupt then the Issuer (and Trustee) would take control of the collateral. In the event that ETF Securities were to go bankrupt then the Trustee and an Administrator would take control of the Issuer's assets which should have no effect on the value of the ETCs since the Issuer is ring-fenced from ETF Securities. Click here to view the counterparty risk factsheet for CSL ETCs.
- ETFS Oil Securities Ltd. - the commodities exposure is outsourced to credit worthy companies who are leaders in the respective field. In the event Shell were to go bankrupt then the ETCs would become an unsecured credit of Shell. In the event that ETF Securities were to go bankrupt then the Trustee and an Administrator would take control of the Issuer's assets which should have no effect on the value of the ETCs since the Issuer is ring-fenced from ETF Securities.
15. Are ETCs eligible investments for ISAs or SIPPs?
All ETFS-branded ETCs are eligible investments for ISAs and SIPPs.
16. Are there any other costs besides Management Fees?
No, although your broker or financial advisor will also charge you normal transactions costs (commissions) associated with the purchase or sale of ETCs.
17. My broker indicated she/he cannot buy the product because it is in USD. What can I do?
Your broker or financial advisor should be able to buy or sell ETCs as they are listed on regulated exchanges. Most brokers should be able to convert a USD amount to another currency. If not, please send us an email or contact ETF Securities directly, and we will put you in touch with a broker that can execute your order.
18. Can investors lose money?
The price of ETCs can go up or down, however investors cannot lose more than the amount of the initial investment.
19. Are ETCs subject to Stamp Duty or Stamp Duty Reserve Tax?
ETFS-branded ETCs are not subject to Stamp Duty or Stamp Duty Reserve Tax.
20. Are there other tax considerations for investors?
Investors s
hould consult their own professional advisers as to the implications of their subscribing for, purchasing, holding, switching or disposing of ETCs under the laws of the jurisdiction in which they may be subject to tax. Tax legislation may change.
21. What is the difference between ETCs and certificates or turbos?
ETFS Oil Securities and ETFS Commodity Securities ETCs are open-ended securities backed by commodity contracts purchased from credit worthy companies who are leaders in the respective field, and multiple market makers ensure tight bid-offer spreads for trading on regulated exchanges. Certificates or turbos are notes created, priced and traded by issuing banks - there are no creations/redemptions on demand and they are generally less liquid.
22. Why have ETF Securities introduced new ETCs that offer exposure to different maturities (i.e. ETFS Brent 1yr, ETFS Forward Agriculture)?
Because the ETCs are priced off underlying commodity futures markets, this provides the possibility of having different price exposures along the commodity futures curve. ETF Securities now provides an entire commodity platform allowing investors more choice and the ability to undertake a wider range of investment strategies.
23. Are ETCs covered by the FSA compensation scheme?
ETCs are not a fund structure and the ETC Issuer is a Jersey incorporated company and are not part of the FSA compensation scheme.
24. Who regulates ETF Securities and ETCs?
ETF Securities and its issuing subsidiaries are all incorporated in Jersey and are regulated by the Jersey Financial Services Commission. The company and those that provide administrative services to the company all require licences issued by the JFSC to conduct the business. The ETCs themselves are issued pursuant to a prospectus approved by the FSA, which acts as the home regulator of such.
25. Can I take physical delivery of my bullion?
All physical products can be redeemed physically. The rights to physical redemption belong to both Investors and Authorised Participants for ETCs issued by Gold Bullion Securities Limited and just to Authorised Participant for ETCs issued by ETFS Metal Securities Limited. For some physically backed ETCs it is possible under certain conditions to arrange for physical delivery of the bullion. Please refer to the relevant prospectus for more information.
26. Has the cessation of the Lyxor marketing agreement had any impact to the structure of Gold Bullion Securities?
Lyxor were marketing agent for Gold Bullion Securities. Lyxor had no ownership rights to the company. All operations and management of the Issuer and ETC stays the same without any impact on the Issuer and ETC.
27. Who audits the metal bars for physically-backed ETCs?
The metal bar audit is done twice a year by Inspectorate, the world leader in commodity inspection and testing. Inspectorate International is a global company providing inspection, testing, and analysis of commodities worldwide, such as metals and minerals. For more information visit: www.inspectorate.com
To view the latest audited bar count for physically backed products, please click here.
28. What is the difference between ETFS Physical Gold and Gold Bullion Securities?
The structures are very similar, track the spot price of Gold less management fees and both trade just like a stock on exchange. Gold Bullion Securities (LSE ticker: GBS) was the first physically backed Gold ETC in the world, listed in 2003.
ETFS Physical Gold (LSE ticker: PHAU) was created in 2007 because ETF Securities recognised the need for an ISA eligible physically-backed Gold ETC. There is also a slight difference in management fee; GBS has a 0.40% per annum MER and PHAU has a 0.39% p.a. MER.
Therefore, they are very similar products apart from the ISA eligibility which is relevant only for UK investors.
FAQs for Oil ETCs
1. I have recently purchased an oil ETC and have noticed that it does not always track the oil price. Why?
ETF Securities Oil ETCs are designed to track the DJ-UBS Crude Oil Sub-IndexSM which is priced off oil futures or a particular oil future contract. Investing in oil futures is not the same as investing in the oil "spot" price.
For more information please review the FAQs document for Oil ETCs.
2. Why can't Oil ETCs just track the oil price?
Tracking the oil "spot" price (meaning the prices quoted for immediate payment and delivery of particular physical commodity) implies physical ownership of the commodities and a number of associated costs such as delivery, storage and insurance. The oil "spot" price which you see on Bloomberg or quoted in the news is by definition not an investable return. As a result, investors throughout the world, and also ETCs, use liquid and standardized futures contracts to get exposure to the oil market. Standardised futures contracts imply delivery costs of pre-specified deliverable grades, at a particular location.
For more information please review the following documents:
3. Can ETFS Crude Oil outperform the oil "spot" price?
Yes, when the oil market is in backwardation, the roll return may be positive and therefore ETFS Crude Oil could outperform the oil "spot" price.
For more information please review the FAQs document for Oil ETCs.
4. What is the DJ-UBS Crude Oil Sub-IndexSM?
The DJ-UBS Crude Oil Sub-IndexSM tracks a rolling, fully collateralised investment in near month oil futures, which is not the same as tracking the oil "spot" price. The Dow Jones-UBS Commodity IndexesSM are priced off commodity futures contracts, and not physical oil.
For more information please review the following documents:
5. Why does an oil ETC return differ from the return of the front month oil future contract I see on Bloomberg/Reuters?
Use of a "Generic" contract can be a source of confusion in some instances. This is because of both the fact that it does not include rolling returns and that rolling methodologies used (1st-5th Business day or 6th-10th business Day) differ from the maturities of the underlying contracts (generally around the 20th of each month).
For more information please review the FAQs document for Oil ETCs.
FAQs for Short/ Leveraged ETCs
1. Can I lose more than my initial investment while investing in Short/ Leveraged ETCs?
No, for example if you were to buy $100 worth of Short or Leveraged ETCs there is a possibility that over a period of time the amount invested could fall to zero if the index the ETC is tracking moves against you. However, the investor can never lose more than that original investment.
2. The Index which the Short/ Leveraged ETC is tracking has moved by 'X' % over the past week but my Short / Leveraged ETC has moved 'Y'%. Why doesn't the ETC track the exact movement of the Index?
The Short or Leveraged ETC is designed to track -1 or 2 times the daily % change of the index. However, the return may not equal -1 or 2 times the change in the Index over periods longer than one day. Please see Part 2 of the Prospectus for more information.
3. Do I have to invest more collateral (as margin) if the index moves against me?
No, because the position is 100% collateralised.
4. Do I need to borrow stock to buy a Short ETC?
No, there is no need to borrow stock to buy a Short ETC. A Short ETC is designed to allow investors to buy an investment with short exposure without the usual hassles associated with borrowing stock and selling short into the market.
FAQs for ETFs
1. Who is ETF Securities (ETFS)?
ETF Securities is the pioneer and leader in Exchange Traded Commodities (ETCs). The management of ETF Securities Limited created the world's first ETC in 2003 - Gold Bullion Securities in Australia and London which now has approximately US$2 billion in assets. In 2005, ETF Securities created the world's first oil ETC and then in 2006 ETF Securities created the world's first ETC platform on the London Stock Exchange, making available 19 commodities and 10 indices. In 2007, ETF Securities created the world's first physically backed precious metals ETC platform, making available platinum and palladium for the first time ever. ETF Securities has most recently launched the largest platform of thematic sector ETFs in Europe providing exposure to European firsts such as Coal, Steel, Shipping and Nuclear Power
Now investors can trade all the world's major commodities on the same exchange and in the same time zone.
2. What is ETF Exchange?
ETF Exchange is the world’s first 3rd Generation ETF Platform offering investor’s access to low cost swap backed ETFs with credit diversification across a number of participants rather than reliance on a single bank. As the banks, APs and market makers compete for business, true liquidity and competition is created.
ETF Securities is working with: Bank of America Merrill Lynch, Citi, and Rabobank International who are participants on the platform, acting as distribution partners, authorised participants and swap providers.
To find out more about ETFX Partners click here.
3. What are Exchange Traded Funds (ETFs)?
ETFs are low cost, transparent, index tracking funds which trade on regulated stock exchanges. ETFs enable investors to gain exposure to well known equity indices or sectors in one trade as easily as buying any ordinary share. ETFS branded ETFs are UCITS III funds that are designed to accurately track the underlying index.
4. How do I buy and sell an ETF?
Investors can buy and sell ETFs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts.
5. Who is the Issuer?
The Issuer is ETFS Fund Company plc, which is an Irish domiciled open-ended investment company having segregated liability between its sub-funds and is authorised by the Irish Financial Regulator as a UCITS.
6. How are ETFs priced and where is the information published?
ETFS’ range of ETFs is priced off the underlying equity index which they are designed to track. They have a Net Asset Value which is calculated once a day. More information on pricing of ETFs is available on the ETF Securities website.
7. Do ETFs make dividend payments?
ETFS’ range of ETFs do not pay dividends to investors. Any income received by the funds in the form of dividends is reinvested in the fund.
8. How can you ensure the tracking error remains minimal?
ETFs are open-ended funds, and therefore Authorised Participants (who are generally investment banks) can create or redeem ETFs at their underlying value or NAV. This helps to ensure that the funds price does not trade at a premium or discount to the NAV.
9. How is liquidity provided?
ETFs are open-ended, therefore new ETFs can be created by Authorised Participants according to demand. Therefore, the liquidity of an ETF reflects the liquidity of the relevant underlying equities.
10. What is the credit risk for investors?
The fund structure is very robust and complies with UCITS III regulations and there is segregated liability between the assets of each sub-fund. The majority of the funds exposure is to short maturity securities from very high quality issuers. The index management is effected through collateralised swap contracts provided by multiple counterparties. This ensures that the ultimate risk to investors is minimal.
11. What would happen if ETF Securities were to go bankrupt?
If in the unlikely situation ETF Securities were to go bankrupt, this would not affect the value of the ETFs. Each ETFs is a standalone fund whose assets are segregated for investor's safety. ETF Securities does not hold any investor money - all cash and exposure management is outsourced to highly rated third party providers.
12. Are ETFs eligible investments for ISAs, SIPPs and CTFs?
All ETFS-branded ETFs are eligible investments for ISAs, SIPPs and CTFs.
13. Are there any other costs besides Management Fees?
No, although your broker or financial advisor will also charge you normal transactions costs (commissions) associated with the purchase or sale of ETFs.
14. Can investors lose money?
The price of ETFs can go up or down with the market, however investors cannot lose more than the amount of the initial investment.
15. Are ETFs subject to Stamp Duty or Stamp Duty Reserve Tax?
ETFS-branded ETFs are not subject to Stamp Duty or Stamp Duty Reserve Tax.
16. Do ETFs hold UK distributor status?
ETFS branded ETFs will seek to achieve UK distributor status
17. Are there other tax considerations for investors?
Investors should consult their own professional advisers as to the implications of their subscribing for, purchasing, holding, switching or disposing of ETCs under the laws of the jurisdiction in which they may be subject to tax. Tax legislation may change.
18. What is the difference between ETFs and traditional index tracking funds?
| |
ETF |
Index Tracker |
| Exchange Traded |
Yes |
No |
| Intra day dealing |
Yes |
No |
| Low cost |
Yes |
Can be very high |
| Forward priced |
No |
Yes |
| Transparent |
Yes |
Yes |
| Stamp Duty (UK) |
No |
Yes |
| Dealing costs |
No |
Can be very high |
| Buy and sell through any broker |
Yes |
No |
| Range of exposures |
Very large |
Normally limited to large equity markets |
19. Are ETFs covered by the FSA compensation scheme?
ETFs are covered by the FSA compensation scheme.
20. Who regulates ETF Securities and ETFs?
ETF Securities range of ETFs are domiciled in Ireland and authorised by the Financial Regulator in Ireland (IFSRA).
FAQs for ETFs tracking 2x Short/ 2x Leveraged equity indices
1. Can I lose more than my initial investment while investing in an ETF a tracking Short/ Leveraged equity indices?
No, for example if you were to buy $100 worth of an ETF tracking a Short or Leveraged index there is a possibility that over a period of time the amount invested could fall to zero if the index the ETF is tracking moves against you. However, the investor can never lose more than that original investment.
2. The return from the ETF tracking the leveraged/short index is different from 2x or -2x the long index return over the last week or month? Why doesn't the short/leveraged index track the exact movement of the long index?
The ETFs track a leveraged/short index which is designed to provide 2x or -2x the daily % change in the reference index (for example, the FTSE 100® Leveraged Index is designed to provide twice the daily percentage change in the level of the FTSE 100® Index) before fees and expenses.
However, the return may not equal 2 or -2 times the change in the Index over periods longer than one day. This is due to the daily rebalancing of the leveraged/short index and also the fact that volatility in the reference index tends to magnify gains and losses in the 2x leveraged or 2x short index.
3. How can daily rebalancing affect the performance of 2x leveraged equity indices?
2x leveraged equity indices are designed to provide twice the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the reference index return over that longer period.
To demonstrate this we take the example of a reference index rising 5% over a 5-day period. In Scenario 1 the reference index achieves the 5% return through various up and down days. In Scenario 2 the index is up 5% over the period following 5 consecutive up days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
| Scenario 1: |
Scenario 2: |
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- In Scenario 1, despite the 2x leveraged index delivering 2x the reference index return each day, the overall compound return at the end of the 5-day period is not equal to twice the 5-day return of the reference index (9.8% vs. 10%).
- In Scenario 2, the volatility is lower and the reference index is trending upwards, the overall compound return at the end of the 5-day period has exceeded 2x the reference index return (10.2% vs. 10%).
This shows that the daily rebalancing of the leveraged index leads to performance differences over periods longer than one day and also that volatility in the reference index tend to magnify gains and losses in the 2x leveraged index.
For more information about long term performance of ETF Securities ETFs tracking 2x leveraged indices please see the description of risks in the prospectus.
4. How can daily rebalancing and volatility affect the performance of 2x short equity indices?
2x short equity indices are designed to provide the inverse of twice the inverse of the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the inverse of the reference index return over that longer period.
To demonstrate this we take the example of a reference index falling 5% over a 5-day period. In Scenario 1 the index achieves the -5% return through various down and up days. In Scenario 2 the index is down 5% over the period following 5 consecutive down days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
| Scenario 1: |
Scenario 2: |
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- In Scenario 1 despite the 2x short index delivering minus 2x the reference index return each day, the overall compound return at the end of the 5-day period is not equal to twice the inverse of the reference index return (9.6% vs. 10%).
- In Scenario 2, the volatility is lower and the reference index is trending downwards, the overall compound return at the end of the 5-day period has exceeded 2x the inverse of the reference index return (10.6% vs. 10%).
This shows that the daily rebalancing of the leveraged index leads to performance differences over periods longer than one day and also that volatility in the reference index tend to magnify gains and losses in the 2x short index.
For more information about long term performance of ETF Securities ETFs tracking 2x short indices please see the description of risks in the prospectus.
5. Do I have to invest more collateral (as margin) if the index moves against me?
No, because the position is 100% collateralised.
6. Do I need to borrow stock to buy an ETF tracking a leveraged short equity index?
No, there is no need to borrow stock to buy an ETF tracking a leveraged short equity index. ETF tracking a leveraged short equity index are designed to allow investors to buy an investment with leveraged short exposure without the usual hassles associated with borrowing stock and selling short into the market.
7. Are ETFs tracking Short/Leveraged equity indices suitable for buy & hold investing?
ETFs tracking short/leveraged equity indices are designed to provide 2x or -2x times the daily % change in the reference index (for example, the FTSE 100® Leveraged Index is designed to provide twice the daily percentage change in the level of the FTSE 100® Index). Investors who choose to hold the ETFs for periods longer than one day should acknowledge that these products are designed for short-term investment strategies and that the ETF return may not equal 2x or -2x the change in the Index over periods longer than one day. This is due to the daily rebalancing of the leveraged/short index and also the fact that volatility due to leverage in the reference index tends to magnify gains and losses in the 2x leveraged or 2x short index. Additionally, increased market volatility and longer holding periods may accentuate the effects of daily rebalancing and leverage and as a result, your investment may not perform as you expect.
8. Where can I get information on the short/leveraged equity indices?
ETF Securities' factsheets include index descriptions, codes and historical performances for all indices used. For more detailed information, all our index providers have websites that provide daily performance; their web address is available on the individual products factsheets. Alternatively you can look up the indices on Bloomberg using the codes provided.
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