Investor appetite for short and leveraged ETFs surged last year, with leveraged currency products hitting record highs, ETF Securities says.
The firm’s short and leveraged division recorded $42m of net inflows across equities, commodities and foreign exchange products.
Meanwhile, inflows into short and leveraged ETFs across all European providers hit $249m, driven by flows into currency and fixed income products.
ETF Securities 3x leveraged currency product inflows jumped six times to record $130m inflows, up from $18m in 2012.
Almost 82 per cent of the flows went into leveraged exposure to a long US dollar, short euro pairing.
ETF Securities short and leveraged platform head Townsend Lansing says the products are popular in the UK, Germany, Austria and Italy.
“Last year, our products on commodities, equities and FX saw significant volume and flows, which we believe reflects how investors are increasingly looking to trade short term trends in these markets and take advantage of a transparent and fully-collateralised structure with independent pricing,” he explains.
The short and leveraged ETF industry is worth more than $50bn and he expects it to continue growing.
Bestinvest senior research analyst Ben Seager-Scott says they are “sophisticated instruments” that should not be entered into lightly.
They are inherently synthetically produced which creates counterparty risk through an investment bank, although many ETP providers mitigate that through behind the scenes collateral, he says.
Inserting leverage into daily asset price moves can create headaches as well, he says. A fall of 50 per cent one day followed by a 50 per cent recovery the next day leaves an investor 25 per cent worse off, he says.
“You have to be aware of the effects of the magnification,” he adds.
“Obviously leverage works both ways so you can also lose quite a lot as well,” he says.
Many sophisticated investors use leveraged ETPs to make tactical macro calls on commodities and currencies, he says.
It is difficult to say whether demand for short and leveraged ETPs in Europe is increasing above the growth of all exchange-traded products, he says.
“If you look across the market generally, ETPs are attracting a lot of flows. They are getting a lot of flows very quickly,” he explains.
BlackRock’s recent ETP Landscape Report shows appetite for Pan-European ETPs jumped in the second half of 2013, posting inflows of $26.7bn – more than double the total attracted in 2012.
However, the European market is less mature than the United States and when the US ETP market was growing, it posted faster growth than Europe is now sporting, Seager-Scott says.
ETF Securities plans to launch more leveraged and short products in the second quarter of this year.
The firm says money flowed out of short and leveraged commodity products, with net outflows of $92m last year.
That was negated by outflows from short copper ($50m), leveraged natural gas ($95m) and leveraged WTI crude oil ($109m).