Guide to leveraged ETF trading (Detailed)

1. What is a leveraged ETF?

Leveraged ETF products are a class of financial derivatives that are very popular in traditional financial markets. It is a trading product that achieves a certain multiple (such as 3 times) of the target daily asset return rate on the premise of a given target asset (such as BTC) . If the BTC price increases by 1%, the net value of the corresponding 3x leveraged ETF product will increase by 3%; and the corresponding 3x product's net value will decrease by -3%.

Leveraged ETF is a perpetual product. When it expires, the price will not completely return to zero, so there is no risk of liquidation. Investors can buy or sell in the high-level market at any time, and do not need to pay any margin to achieve the purpose of trading leverage.

Fixed leverage tokens are denominated in USDT, and the trading mechanism is similar to currency trading. A leveraged ETF is essentially a unit share corresponding to a fixed leverage base. The base management manages to ensure that the base returns a fixed multiple of the fixed asset return. The investor can obtain the underlying assets by trading ETF product shares. A specified multiple of the return. When the target asset's volatility in the opposite direction exceeds a set threshold, by introducing a rebalance mechanism, the fund manager readjusts the fund position to ensure that the fund's net worth loss does not exceed a certain limit.

In short, through risk management measures based on management, ETF investors can be relieved of concerns about liquidation and obtain a certain leverage ratio of the return on the underlying assets.

At present, each token supports 3X Long and 3X Short. You can view the full list of leveraged ETFs through [Official Website—Quote Center—ETF Zone].

2. Advantages of leveraged ETFs

Here are the advantages of leveraged ETFs that deserve attention:

· Spot trading, no margin required

Users can purchase leveraged ETFs on Hotcoin like ordinary spot purchases, which saves users from issues such as margin and liquidation of risks. Taking 3 times BTC (BTC 3L) as an example, the user only needs to check the price and net value -enter the purchase amount-choose to buy BTC 3L, and no other operations are required.

Compounding effect, risk control

The leveraged ETF will automatically transfer the position gain to the principal, that is, if the user's leveraged ETF generates a floating profit (there is no floating profit before rebalancing), then the next rebalancing, the floating profit will make the leveraged ETF position Increase, that is to add 3 times the position of floating profit, making the income form a compound interest pattern.

At the same time, leveraged ETFs come with a risk control mechanism (see the rebalancing mechanism section below for details). For example, if the user is 3 times long BTC contract, then BTC falls by 33%, then no doubt that the user's position will be closed, with nothing. However, if the user buys BTC 3 times (BTC 3L), the leveraged ETF will fall according to market conditions and adjust the position through the rebalance mechanism to avoid the user's position being closed. Even if the BTC price falls by 33%, the user position will still Assets remaining.

3. the price mechanism of leveraged ETFs

The essence of a leveraged ETF is to ensure that ETF holders enjoy a fixed target multiple of each return on the underlying asset through a fixed leverage-based return. This fixed leverage base is managed by the platform or a fund manager recognized by the platform. The platform announces the fund's net value in real time to maintain a high degree of transparency.

Theoretically, the net asset value is the fair transaction price of ETF shares in the secondary market. However, due to fluctuations in market sentiment, there may be a situation where the transaction price of the secondary market deviates from the fair price (fund's net value) at a certain period of time, resulting in a predetermined premium.

When the premium exists, there will be arbitrage opportunities. Arbiters in the high-level market can gradually eliminate the premium through arbitrage operations to ensure that the price of token transactions closely follows the fair price. For ordinary users, they should pay attention not to deviate too much from the net value of their order, or they will suffer a large loss. At the same time, when the net worth price is lower than a certain threshold (0.05U in the initial stage), the platform will perform a consolidation operation on the variety (change the net worth price 10 times before the merger, but the corresponding quantity will also become 1/10 before the merger, The user's total assets will not be affected in any way) to improve the sensitivity of price changes and optimize the trading experience.

Calculation of fund net worth

The net value of the fund at  v  point in period K is calculated by the following formula:

  Investors can purchase a certain amount of tokens through the secondary market at any time to hold a corresponding share of the fund. However, if an investor purchases a certain number of tokens at a certain point v in the k-th period (between tk−1 and tk), the return rate of the tokens held until tk does not equal the corresponding underlying asset in the same M times the return on the period. Only when the investor buys tokens at tk−1, can the current rate of return be M times the corresponding rate of return on the underlying asset.

Calculation of fund net worth

Take one day as a time period (UTC + 8 00:00:00 to the next day UTC + 8 00:00:00), the end of the k-th period is recorded as tk, k = 0,1,2, ..., where t0 = 0. Let the initial net value of the unit fund be 100USDT, that is, S (0) = 100 USDT.

S (0): initial value of the fund;
S (t): net value of the fund at time t, t ≥ 0;
P (0): price of the underlying asset at the initial moment;
P (t): underlying asset at t Price at the moment;
M: Target leverage multiple, which can be 2, 3, -1, -2, -3.

The fixed leverage base is essentially an active management base, so that the return rate of each cycle is anchored to M times the corresponding return on the underlying asset. As the price of the underlying asset changes, the underlying positions at the beginning of each cycle must be adjusted to ensure that the target can be achieved. Position adjustment mainly adjusts positions based on the net asset value at the beginning of each cycle, so that the risk exposure of this cycle is anchored to M times the risk exposure of the underlying asset. If the net value at the beginning of the period is S (tk), the exposure set at the beginning of the period is the equivalent USDT position of M * S (tk).

4. Rebalancing mechanism of leveraged ETFs

Under normal circumstances, the platform will rebalance positions at 00:00:00 (UTC + 8) daily to ensure that the combined leverage ratio and the agreed ratio do not deviate too much. When there is a sharp fluctuation, if the target asset ’s fluctuation range exceeds the given threshold compared to the previous rebalance point (in the beginning we set the threshold to 15% for 3 short and long. In the future, if other multiples of the product, the threshold may be (Different), we also perform temporary rebalancing to control the risk of the portfolio. The temporary rebalancing is only for the party that has lost money because of this fluctuation range, that is, if the BTC increase is 15%, we will rebalance the -3 times leveraged ETF and make no adjustments to other products. Please note that if the market trend continues after the irregular rebalancing is triggered, the user's loss will become smaller, but if the market trend reverses immediately after the trigger, the speed of the product's rebound will also be weakened by the rebalancing to lighten up.

As mentioned earlier, if the daily leveraged ETF is profitable, the profit will be reinvested. If there is a loss, some of the positions sold will be restored to 3 times the leverage to avoid the risk of forced liquidation.

Changes over several days

For example, if you look at multiple products with three times positive BTC, if the daily trend of BTC is + 10%, + 10%, + 10%, + 10%, then the 4-day yield of this product is 185%, which is higher than 3 times 44% of the 4th spot income; if the daily trend of BTC is -10%, -10%, -10%, -10%, the 4-day loss of the product is 76%, which is less than the 4-day spot loss 3 times 35%; if the daily trend of BTC is + 10%, -10%, + 10%, -10%, then the product's 4-day yield is -17%, which is underperforming the 4-day spot yield -3% of 2%.

Therefore, when time spans a rebalancing cycle, a leveraged ETF does not guarantee a fixed multiple relationship between the cumulative return rate and the spot return rate over multiple days. Generally speaking, under the trend market, the performance of leveraged ETF will be better than the declared leverage multiple (that is, the cumulative increase of ETF in the same direction will exceed 3 times the target rate of return, while the opposite direction ETF will decrease by less than 3 times of the target rate of return. ), And the performance of leveraged ETFs in a volatile market will be worse than the stated leverage.

5. the rate of leveraged ETF

Leveraged ETF trading pairs are spot transactions. The transaction fees are as follows:

The transaction fee for trading leveraged ETF products on Hotcoin is 0.2%. At the same time, we will charge a management fee for each leverage to pay the fund rate generated by the fund portfolio (typically 0.1%, which will be adjusted according to market fluctuations in the future. The specific management fee for each target can be viewed on the corresponding transaction page), necessary fees such as transaction fees. The management fee will be reflected in the change in net worth, that is, it will be presented in the form of 'deducting the value of the corresponding leveraged ETF', and it will only be charged at 0 o'clock Singapore time. If you do not hold the product at that time, there will be no cost.

6. Applicable scenarios of leveraged ETFs

Due to the leverage adjustment mechanism of the leveraged ETF, the most applicable market conditions are: unilateral market (or trend market) . At this time, the performance and advantages of the leveraged ETF will be very obvious; ) Under the market, leverage ETF will cause more wear and tear.

Therefore, to reduce risk exposure, we must first make a correct judgment of the market price trend, and then pay attention to the direction of market fluctuations and whether it is a unilateral market.

Statement :

Leveraged ETFs are emerging financial derivatives. The above does not constitute investment advice. Please pay attention to risk control.

Leveraged ETFs greatly reduce the risk of strong liquidation, but in extreme conditions, there will be risks of approaching zeroing and liquidation. Please pay attention to the difference between net value and price to avoid suffering losses.