Leveraged Inverse Products - SGX Online SIP Module
A leveraged product uses financial derivatives to amplify the returns of an underlying asset. These products aim to keep a daily constant amount of leverage during the investment time frame, such as 2x or 3x.
Inverse products
An inverse product is a product that uses financial derivates to provide inverse returns of an underlying asset. These products tend to have a constant amount of leverage such as -1x, -2x or -3x.
Both products are structured as collective investment scheme (funds). Both products aim to deliver a daily return that is based on a multiple (long) or multiple inverse (short) of the daily return of the underlying index that is tracked.
Who are these products suitable for?
Sophisticated investors who manager their portfolios on a short-term basis (E.g. daily) and are not recommended for long term investment.
It is also worth being aware that the leverage exposure effect implies that both the losses as well the gains are multiplied.
If an investor’s trading horizon is over a few days, it is important to note that the performance of the products may vary from the leverage factor of the product. This is because the performance of the underlying index and the product is reset at the end of each trading day.
Similar to DLCs, when markets open the next day, the performance of the underlying index and the products will be measured from the closing levels recorded on the previous trading day. This means that any subsequent performance of the products is calculated based on the performance achieved the day before.
The same process is repeated on each trading day and hence over a period of days, the profits or losses are compounded.
In addition, risk factors such as counterparty risk, market risk, tracking error risk, foreign exchange risk, interest rate risk and liquidity risk similar to ETFs are applicable.