Industry Updates

Navigating market volatility with short and leveraged ETPs

The dos and don’ts of using S&L ETPs in volatile markets

Theo Andrew

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Investors need to look beyond the traditional buy-and-hold investment strategy and should take a hands-on approach in a market where uncertainty and volatility reign supreme, according to the latest ETF Stream webinar, in partnership with GraniteShares.

The webinar, titled Navigating market volatility with short and leveraged ETPs, started by highlighting the plight of the traditional 60/40 portfolio, which has lost money in a turbulent first quarter of 2022, the first time it has done so since coronavirus-stricken markets in 2020.

Markets have experienced a high level of volatility in Q1 on inflation fears and an expectation that the Fed will raise rates on several occasions throughout the year. These factors have been exacerbated by Russia’s invasion of Ukraine meaning commodities have been some of the only top performing assets this year.

Will Rhind, CEO and co-founder of GraniteShares, said: “In some respects, it has been a showcase environment for the short and leveraged ETPs and understanding how you can use these to take advantage of market movements. You have to be more active in this environment. This is not an environment where buy and hold will necessarily work.

“If you are prepared and your time horizon is decades then clearly a buy and hold is probably still a very attractive thing to do. However, this is an environment where you've got rampant inflation, you've got risks all over the place, and people are looking to take action.”

Rhind likened today’s economic environment to the 1970s, a period in which both equities and bonds lost money while real assets gold and commodities were the top performers.

“In this environment it is about picking your spots, the right companies or sectors to go long or short on but making sure you are active in this environment where things are changing so quickly,” he said.

Rhind added that GraniteShares, through its collateralised short and leveraged exposure to a single stock exchange-traded product (ETP) range, can offer investors the high conviction play they are looking for in the current market turbulence.

This can be seen in previous periods of volatility, such as the COVID-19 pandemic, when Rolls-Royce emerged as a key pandemic stock, lurching from peaks to troughs on lockdown and reopening news which eagle-eyed investors took advantage off through both long and short positions.

“Investors were able to interpret a story like COVID-19 through a single-stock ETP such as Rolls-Royce which is so intrinsically linked to the travel to the lockdown the reopening story,” Rhine said.

He also highlighted the huge demand for the GraniteShares 3x Long TESLA Daily ETP (3LTS) which has outperformed Tesla by 625% since launching in June 2020.

However, investors’ handling of these products does come with a word of warning. An investor’s holding timeframe or tactical allocation of short and leveraged ETPs depends on the level of conviction they have in the stock.

“Where you get into issues is when investors do not have a strong conviction. If you buy and hold and leave the product in a choppy environment and the market goes down or against you, then clearly your potential to lose a large amount of money,” Rhine said.

“If investors are not comfortable holding the product for longer than a day they do not need to. That is the beauty of an ETP, investors can buy and sell on exchange during market hours.”

To watch the full webinar, click here.

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