Leveraged and Inverse Exchange-Traded Products

You already know ETFs. Here’s what else is exchange-traded.

You already know ETFs

ETFs have made it easier for investors and traders to access a basket of securities or follow the performance of a market index through a single exchange-listed product — but ETFs are not the only products traded on an exchange.

Leveraged and Inverse Exchange-Traded Products, also known as L&I products, offer another way for investors and traders to take a short-term view on the direction of a market.

While L&I products may be less familiar to investors in Singapore, they are well-established in overseas markets such as the US, South Korea and Taiwan, where leveraged and inverse products are actively traded by market participants seeking short-term exposure to major indices and market sectors.

Like stocks and ETFs, L&I products are:

Listed and traded on a stock exchange
Bought and sold through a brokerage account
Identified by their own trading codes
Traded during the exchange’s market hours

What makes them different is how they are designed to respond to the daily movement of an underlying index.

What are Leveraged and Inverse Exchange-Traded Products (L&I)?

L&I products are exchange-traded products designed for investors and traders who have a view on whether a market or index may rise or fall over the short term.

A Leveraged ETP seeks to magnify the daily movement of its underlying index.

An Inverse ETP seeks to move in the opposite direction from its underlying index each day.

This gives traders two ways to express a market view:

	Leveraged ETP	Inverse ETP
Market view	You expect the underlying market or index to rise	You expect the underlying market or index to decline
How it works	Seeks to multiply the index’s daily return by a stated factor	Seeks to deliver the opposite of the index’s daily return by a stated factor
Illustrative example	If an index rises by 1% in a day, a 2x leveraged product would seek to rise by approximately 2%	If an index falls by 1% in a day, a -1x inverse product would seek to rise by approximately 1%
Common use	Taking a short-term bullish position	Taking a short-term bearish position or managing downside exposure
Holding approach	Designed around a daily objective and requires active monitoring	Designed around a daily objective and requires active monitoring

The reverse also applies. A leveraged product may experience magnified losses when its underlying index falls, while an inverse product may lose value when its underlying index rises.

The key word is “daily”. The stated leverage or inverse factor applies to the product’s daily return, not necessarily its return over several days, weeks or months.

Because the product resets its exposure daily, the effect of compounding can cause its longer-term performance to differ from a simple multiple of the index’s cumulative return. The difference may become more pronounced when markets fluctuate frequently.

L&I products are therefore generally used for short-term market views and require closer monitoring than conventional long-term investments.