‘I would rather bet on the Gold Cup’: Product Panel on GraniteShares’ single stock ETPs

The new single-stock exchange-traded products launched in Europe by GraniteShares caused something of a negative reaction among the panellists. It is the very nature of the product which appears to be at issue, as you can see.

While Will Rhind, founder and CEO at GraniteShares, says his company is “proud to bring this new innovation to the UK market,” there is more than a hint in the panel’s reactions that this might be an innovation too far.

What the company says:

“The convenience and transparency provided by ETPs means that investors with the appetite and experience to use leverage can trade through investment platforms rather than having to open a margin account,” says Rhind.

“At a time when it has become statistically harder and harder to actually make money in the markets and outperform, GraniteShares is giving investors the ability to express very focused views, both long and short, on popular UK single stocks through ETPs.”

What the panel says:

Nicolas Rabener, FactorResearch

GraniteShares is going against the trend of investors migrating to index-level by launching leveraged single-stock ETPs, which can be viewed as alternatives to CFDs.

It is questionable if these ETPs are an enrichment to the ecosystem as there is little evidence that stock picking works and a lot of evidence that leverage is harmful to investors, which defines these as highly speculative products.

Having said this, UK retail investors have an unquenchable thirst for leverage and a strong belief in active management that might make these a commercial success.

Rumi Mahmood, Nutmeg

The GraniteShares single stock leveraged ETPs are an interesting addition to the London listed ETP range, structured to enable investors to gain three times the daily return on a selection of UK large-cap stocks.

The leverage factor is reset daily, and it is important to note that such products naturally exhibit a compounding effect, meaning that with increasing volatility, over time, the product performance deviates further from the underlying stock performance.

Leveraged products are more suited to sophisticated and informed investors who are willing to speculatively take a lot of risk or hedge their positions; with the understanding that they may lose the full value of their investment and that losses are magnified due to the nature of leveraged returns. At 99bps the product is expensive, however much of this includes the arranger fee and swap spread.

Mark Northway, Sparrows Capital

Single-company leveraged ETPs compete directly with CFDs. ETPs have the advantage of being exchange traded, which suggests the possibility of a liquid market. The ability to sell to a third-party and the engagement of a committed market-maker are positives relative to CFDs.

The ETPs will have standard terms, no margin call and (presumably) counterparty risk controls, and will not need to be rolled at quarter-end dates like a CFD. The ETP benefits from ISA and SIPP eligibility, although arguably it’s not a suitable vehicle for long term savings.

The ongoing costs of 1% per annum on top of the interest component of the swap pricing make it expensive to hold over an extended period. Compare this with Tabula’s 0.5% per annum for their 3 times leveraged credit default swap ETF (TCEP). It’s expensive.

This is a short term trading instrument, not an investment. It could be argued that the short versions have some role in hedging risk, but hedging is generally about reducing beta and therefore better done with index instruments.

There have been attempts in the past by the likes to Boost and Leverage Shares to create markets for single name ETPs, but they have not caught on. They are, perhaps, a solution to a problem that does not exist.

Peter Sleep, 7IM

I would regard the Granite ETPs as gambling products rather than investment products. The European gambling market already has CFDs and spread betting and these ETPs seem to be a variation on the theme. A levered long or short bet on a price movement.

The advantage of the Granite ETPs is that you will not lose more than your stake money, whereas CFDs and spread bets are margined, so you could lose more than your initial investment.

The downside for a UK punter is that you pay capital gains tax on ETPs, but not on spread bets. (This is not tax advice.) The fees on the Granite ETPs are about 1.75% annualised, which strikes me as reasonable against the spreads and financing costs of spread betting. And the cost of entry to Fontwell.

The other thing to watch with levered ETPs is a daily reset mechanism which means that they can behave in counterintuitive ways if they are held for longer than a day. A holder may be directionally right, but if these products are held for a long time you could lose money. I would rather bet on the outcome of the Gold Cup.

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