1. What is Leveraged ETF?
Definition of Leveraged ETF
A leveraged exchange-traded fund (ETF) is a product that uses financial derivatives and debt to amplify the returns of an underlying token. For example, if the underlying token rises 1%, the corresponding 3x leveraged ETF rises 3% respectively, while the -3x products falls 3% respectively.
A leveraged ETF is essentially a fund managed by a professional financial team. Each ETF product corresponds to a certain number of futures contract positions. The fund manager can dynamically adjust the futures positions so that the entire fund share can maintain a fixed leverage for a certain period of time. A professional team is responsible for the management and maintenance of the investment portfolio, allowing investors to easily build their own constant leveraged investment portfolio without needing to understand the specific mechanism.
How leveraged etfs work
When the underlying token (BTC) along the swings in the opposite direction than a threshold value, the fund management will introduce the mechanism of rebalancing, recalibrate fund positions to ensure that net fund losses do not exceed a certain limit. In this way, the price will not completely return to zero, so there is no risk of burst.
The operation process of leveraged ETF
Leveraged ETF are sustainable products, which will not expire. Investors can buy or sell on the secondary market at any time, and do not need to pay any deposit to achieve the purpose of trading leveraged.
2. Advantages of Leveraged ETF
Leveraged ETF fully combine the advantages of ordinary spot trading, leveraged trading and contract trading, but at the same time are more robust in risk control. The specific advantages of leveraged etfs are as follows:
(1) The operation is as simple as spot trading, with no borrowing and margin required, but higher yields
Leveraged ETF are with leverage, but operation process as convenient as spot trading. Users can buy leveraged ETF like regular spot, , both don't have to like leveraged trading to borrowing in advance, don't like contracts need to bear the risk of margin, forced liquidation risk. Investors can save energy and pursue higher returns at the same time. Take 3 times long BTC (BTC 3L) as an example, users only need to look at the price and net value -- input the purchase quantity -- choose to buy BTC 3L, without any other operation.
(2) Effect of compound interest
Leverage trading and contract trading start with the principal and the principal doesn't change. Leveraged ETF will automatically positions the proceeds into to the principal. If the user to buy leveraged ETF has produced gains (without prior gains of rebalancing), when rebalancing next time, floating surplus will increase leveraged ETF positions, namely the new 3 times the gains positions, make profits form a compound model.
(3) No explosion, robust risk control
Unlike contract trading, which involves taking the risk of exploding positions, leveraged ETF have built-in "rebalancing" risk controls that prevent them from exploding.
For example, if BTC falls by 33%, the 3 times BTC long contract will be liquidated undoubtfully, while the leveraged ETF product BTC3L, through rebalance mechanism, will not approach zero. There will be some asset left.
(4) Low trading fees
Leveraged ETFs are held at lower trading fees than the interests on borrowed funds in leveraged trading.
3. Price Mechanism and Rebalance Mechanism of Leveraged ETF
(1) Price Mechanism of Leveraged ETF
Leveraged ETF, essentially, is a fixed-leverage fund that allows its investors enjoy the yield of underlying asset with certain times every day. The fixed-leverage fund is managed by the platform or the certified fund manager. The platform will release the net value of the fund in real time, to ensure transparency.
Theoretically, the net value per share is the fair price of leveraged ETF product in secondary market. However, due to the volatile crypto market, there’s possibility that the transaction price in the secondary market derivates from the fair price (net value) in a certain period of time, causing premium.
When premium exists, there’s profit opportunity in secondary market, so the profit-earners will take the opportunity to gain earnings and remove the premium. As such, the transaction price back/near the fair price. For ordinary users, the order price you put shall not be too far away from the net value, or you may suffer great losses.
The following is the formula for calculating net value:
(2) Rebalance Mechanism of Leveraged ETF
Generally, the rebalance will be performed at 00:00 (UTC+8) every day to avoid the enlargement of the gap between portfolio's leverage ratio and the agreed ratio. When there is a sharp fluctuation and the underlying asset ’s fluctuation exceeds a given threshold figure compared to the previous rebalance point (initially we set the threshold figure for 3x leverage short and long as 15%. In the future, if other leverages available, the figure may be adjusted.), we will perform rebalancing to control the risk of the investment portfolio in time. The rebalancing is only for the party that has lost money in the volatile market. For example, if the BTC rises by 15%, we will rebalance the BTC3S product, and will not adjust BTC3L. Please note that when the market trend continue to rise or fall after rebalancing, user’s loss will be decreased, but if the market trend converses after rebalancing, the bounce of the product price may also become weaker than that before the rebalance triggered.
Return Rate Dynamism
Take BTC3L (BTC 3x long product) as an example.
If the daily trend of the BTC in spot market in four days is +10%, +10%, +10%, +10% respectively, the return rate of BTC3L will be 185%, higher than the 3 times of the return rate of BTC in spot market (that is 44%);
If it is -10%, -10%, -10%, -10% respectively, the return rate will be -76%, lower than the 3 times of return rate of BTC in spot market (that is 35%);
If it is +10%, -10%, +10%, -10%, the return rate of BTC3L in four days will be -17%, underperform the 3 times of BTC’s return rate in four days of 2%.
Therefore, we can see that when it exceeds a rebalance period circle, the accumulated return rate of leveraged ETF product is unable to keep fixed leverage to that of the spot product. Specifically, under a single market trend (rise/fall), the performance of leveraged ETF will overtake the claimed leverage times (i.e. the accumulated increase amount of leveraged ETF product in the same direction will surpass the 3 times of return rate of the underlying asset, and the accumulated decrease amount of the inverse leveraged ETF product will be smaller than the 3 times of the underlying asset’s return rate). However, the performance of leveraged ETF product under fluctuation market will underperform the claimed leverage times.
Lecture 4: Trading Fee of Leveraged ETF
The trading fee rate of leverage ETF product is the same as spot trading fee rate, that is 0.2%. Besides, Dcoin will charge management fee for each times leverage every day (The general was 0.1%, and the management fee rate is dynamic based on the performance of crypto market. ) to pay the funding rate, trading fee and other necessary charges generated by the fund portfolios. The management fee will be manifested on the dynamics of net value. It is only charged at 00:00 (Singapore time). No fee will be charged if you do not hold Leveraged ETF product at the time point.
5. Suitable Scenarios for Leveraged ETF
The best scenario for leveraged ETF is in single trend market (rise/fall) because of the existence of rebalancing mechanism. In such scenarios, the advantages of leveraged ETF are at their best play. But in fluctuation market (for example, rise and fall greatly), its advantages will be less prominent.
Leveraged ETF is suitable for investors with the following characteristics:
- Users who want to profit from the up market, also want to profit from the down market;
- Users who want to leverage your earnings;
- Users who have the ability to take risks, but do not want to take the risk of similar contracts.
6. The Mechanism by Which Leveraged ETF Achieve Profit and Loss
Leveraged ETF work in much the same way as spot trading, with investors making profits by judging the ups and downs of anchored tokens.
Take BTC as an example. User A buys BTC3L with 1000USDT. When the price of BTC rises by 10%, the net value of the BTC3L will rise by about 30%, and your total assets will rise to about 1300USDT. Compared with direct purchase of BTC, an additional profit of 200USDT can be generated.
Taking BTC as an example. User A buys BTC3S with 1000USDT. When the price of BTC falls by 10%, the net value of the BTC3S will increase by about 30%, and your total assets will rise to about 1300USDT.
In addition, if the anchor token moves in the opposite direction to the operation, then the loss will become three times,. Investors should pay attention to the risk.
7. The Advantages of Trading Leveraged ETF on Dcoin
As the world's leading financial service platform, Dcoin has a swiss-based security technology architecture. The core advantages include:
1、Trading fees are extremely low
Dcoin charges a lower fee in leveraged ETF than other platforms, charging a management fee of just 0.1% per leverage per day.
2、Users can benefit from the upside and downside, and the risk is manageable.
The underlying token, whether rising or falling, Users can benefit from it and can amplify returns by leverage, taking on less risk than contract, striking a perfect balance between returns and risks.
3、Strong technical strength, more solid trading experience
Dcoin has the security technology architecture of Swiss stock exchange and the top fund management team, with strong technical strength.
Leveraged ETF is a tradable product that tracks three times the daily profit of underlying assets. Users shall pay attention to the gap between the actual net value of the product and the latest price when placing an order. If you put the order in the opposite direction, there is a risk that the price will approach zero in extreme conditions. This product subjects to the derivative with high risk. Please watch out the risk in investment.