Global X hails its ‘safe’ leveraged shares

Global X, the $8.6bn New York investment boutique, will on Monday launch the world’s first range of leveraged exchange traded products linked to individual stocks. 

The move is a radical departure from conventional exchange traded funds, which track indices constructed from large numbers of securities. The new products, branded Leveraged Shares, are designed to deliver double the daily returns of 25 top US-listed stocks including Apple, Disney, Microsoft Alphabet and Facebook. 

“Our research has identified a demand for exchange traded  products that can enable sophisticated traders to efficiently gain leveraged exposure to specific stocks,” said Jose Gonzalez, co-founder of Global X. 

He said investors had several ways of achieving similar outcomes through futures, options and swaps but Global X believed Leveraged Shares were safer than a derivative-linked structure. 

Instead of using derivatives to multiply returns, cash will be invested via a margin account to allow Global X to borrow money to buy securities. This financing facility will be provided by Interactive Brokers, a Connecticut broker dealer that will charge the Federal Funds interest rate plus 100 basis points — 2.25 per cent. Investors will also pay a yearly 75bp management fee.

The launch marks Global X’s debut in the UK. In the US, regulators have repeatedly warned that leveraged exchange traded products are unsuitable for retail investors because they can result in unexpectedly large losses if held for longer than a single day. 

Our research has identified a demand for products that can enable sophisticated traders to efficiently gain leveraged exposure to specific stocks

Jose Gonzalez, co-founder of Global X

Leveraged exchange traded products worldwide attracted about $3bn in net new investor inflows in 2017, boosting their total assets to about $48bn at the end of December, according to ETFGI, a London-based consultancy. 

The Global X launch coincides with a crackdown by the UK regulator on companies that offer risky investment products to retail clients. The Financial Conduct Authority said it had uncovered “areas of serious concern” in a review of the market for contracts for difference.

CFDs allow investors to gamble on price movements without owning the underlying asset. It found that three-quarters of retail investors who used CFDs lost money. 

A London wealth manager who did not wish to be named said he was “surprised” that Global X had been allowed to proceed with its initiative by the UK regulator. 

“How can Global X restrict the use of these products to sophisticated investors if they are listed? The term ‘sophisticated investor’ is designed to be highly restrictive under the FCA’s rule book,” he said.