As CFDs and leveraged trading continues to come under fire from the regulators for being inappropriate for the majority of inexperienced investors I have a chat with José Carlos Gonzalez, the founder and CEO of Leverageshares.com on why his ETFs are different. His Leverage Shares are ETFs that allow investors to get 2x and 3x long and short exposure to single stocks like Alphabet (Google), Facebook, Netflix, and Apple.
Why did you set up Leverage Shares?
Previously, I was one of the co-founders of another ETF company, based in New York, called Global X. The firm was started by myself and another friend from Spain back in 2008, at a challenging time. Investors were using more and more ETFs to build portfolios and brokers were using ETFs to build models, so it seems like the industry has changed dramatically from a stock beginning to asset allocation, and obviously, part of the winners of those trends have been ETFs.
The business was quite successful, we grew it to about 10.5 billion UAM and a couple of years ago, we sold Global X to a Korean asset manager called Mirae.
We always wanted to do something in Europe, but couldn’t figure out what. The European market is very different to the American one, more of a distribution-based model than a product model.
We thought of the idea of doing basically single ETPs with a leverage factor which we couldn’t do in the US. We started working on that idea around two and a half years ago. By the time we launched the product within Global X, we were in the process to sell the business. The risk profile is very different to what big banks want, so Mirae, really had no interest in leverage service. So when we sold the business, that wasn’t included in the sale.
I stepped out of Global X and then I became a de facto CEO for Leverage Shares. It’s been a couple of interesting years.
How has the business been going so far?
We have big hopes for the business, the AUM is a little disappointing, but it’s similar to when we started Global X. In order to grow, you have to have a solid foundation. A lot of the focus has been building a platform that we can use for different products and different ideas to eventually become an alternative platform for investors where we do things that basically fall between traditional asset managers and structure products from investment banks.
Right now, we have 40 products, in the next four to six months, we’re probably going to come to market with another 60.
We want to provide access to different things, we want to fixed income, we want to do commodities, we want to do broad indexes, we want to have a bigger menu for singular stocks with leverage or inverse exposure.
A lot of the time has been on infrastructure work behind the scenes which people don’t see unless you are there. The next phase is to build a brand and have a customer base that is broader. Hopefully, investors will trade our products, they will have a good experience and they’ll keep coming back.
What are the main advantages of buying leveraged shares compared to leveraged trading?
One of the advantages that we have is that we’re fully transparent. The products are physically replicated. We publish everything on the website, what their holdings are, so you know there are one million dollars on the Apple product and that’s fully secure by, 5,000 shares of Apple stock. You know exactly at every single moment what’s behind your investment.
I think that’s also easier for market makers because they can price their security more accurately, than if it were to be like a swap-based Apple product.
Our products are about a third of the cost of what competitors charge. I think that’s a big plus and a lot of the time, people don’t realise that, or they think it’s not that important because these products are meant to be for just one-day trading period. But it is important.
What we’ve seen in Europe is pretty similar to what you see in the US between the cash market and the futures market. If you try to open an account at a US brokerage firm, there are very few firms that allow you to trade futures and cash on the same platform. For the most part, both platforms are split.
I mean you can do at TD, you can do it at Interactive Brokers, but it’s not that common. And I think in Europe, you have the same thing with margin trading. You have brokerage platforms that do CFDs and spread betting. But, if you trade on a cash market, usually, they don’t allow you to trade on margin.
I think that our products solve some of those challenges.
The other thing is in reality CFDs have some issues. I think people, don’t like CFDs. I don’t think they are transparent enough. The leverage is just way too high. When we started the business, we always thought of CFDs as a competitor and we tried to do a product that accomplished some of the same things in the sense that you could leverage your exposure, but I tried to do it better. I think the ETPs are the right solution. I also think the physical replication is the right strategy and is way better for investors.
What are the major downsides and risks of using leveraged shares?
Obviously, these products are not for everybody. When you buy two or three times leveraged products that are secured by a single stock, it’s very risky. It can go both ways.
If you do the wrong trade, the reality is that you can lose a lot of money very quickly.
The idea for these products is that people should use them if they have a strong conviction and their holding period will be pretty short-term. This shouldn’t be a buy and hold type of investment and clearly, investors shouldn’t invest 100% of their money in these type of products.
What’s your favourite book on investing?
One of the books I read lately, which it’s not 100% about investing, but there are a lot of insights that could help you become a bigger investor is, Principles by Ray Dalio. It’s very interesting because it’s about how you manage your own life but it makes you be thoughtful, but also realistic.
I think a lot of the problems with investors is when we invest, we tend to be very unrealistic. If things go up, we think this is going to continue forever and if things go down, it’s pretty hard to think straight and maybe you can find an opportunity elsewhere. That book is about having a plan and executing that plan and rethinking that plan. I think that’s what investors should do.
People work very hard to save money and obviously, you don’t want to lose it.
What’s the one bit of advice that you could give to help people make more of their investments?
There are two things that investors can control, one of them is diversification and the other one is cost.
I think everything else in a way is a little bit out of our control. But if you’re an investor and you diversify your portfolio, I think over the long term, you are going to do better and you’re not going to be as stressed. The reality is like there are a lot of ways you can diversity your portfolio in a very efficient way and very cheaply, and ETFs are one of those.
The other second factor is expenses. We are in an environment where interest rates are zero or negative. Retail investors buying a fixed income product can pay two percent to manage that money. But if the interest rates are negative, you’re probably giving 50% or 60% of the expected return of the product. One and a half, two percent doesn’t look that much, but when you think about your expected return being four percent, then all of a sudden, the percentage becomes very, very big.
As an investor, those are the two things people should be super careful with.
- A) Make sure they pay a fair fee on the products
- B) Make sure they diversity and they just don’t put all their eggs in the same basket.
José Carlos Gonzalez is the Founder Chief Executive Officer of Leverage Shares
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