Leveraged and Inverse Exchange Traded Funds Risk Disclosure Statement
1. This statement is provided to you in accordance with the directives of the Rules of Bursa Malaysia Securities Berhad.
2. The purpose of this statement is to inform you that the risk of loss in purchasing leveraged and inverse Exchange Traded Funds (“L&I ETFs”) units can be substantial. You should assess if the purchase of L&I ETFs units is suitable for you in light of your financial position, risk tolerance and investment experience while taking into account the following risks before deciding whether to invest in L&I ETFs:
i. An investor of L&I ETFs is subject to the risk of losing the full purchase price of the L&I ETFs units;
ii. The investor should keep in mind that L&I ETFs are intended to track and replicate up to a multiple of performance of an index or a multiple of the inverse performance of an index on a daily basis;
iii. As such, L&I ETFs are more suitable for short term trading/ positioning. Holding L&I ETFs units for more than a day could result in investment returns that deviate greatly from the multiple of performance of an index or a multiple of the inverse performance of an index that the L&I ETFs are supposed to track;
We understand that an Index 2x Leveraged ETF does not necessarily give us twice the return of the Underlying Index which is illustrated in the following 3 scenarios:
Scenario 1:
5 days cumulative return comparison, index increases by 10% daily.
2X Underlying Index cumulative return is 122% while Index 2x Leveraged ETF cumulative return over the same period is 149%.
Scenario 2:
5 days cumulative return comparison, index decreases by 10% daily.
2X Underlying Index cumulative return is -82% while Index 2x Leveraged ETF cumulative return over the same period is -67%.
Scenario 3:
5 days cumulative return comparison, index increases and decreases by 10% alternatingly.
2X Underlying Index cumulative return is 16% while Index 2x Leveraged ETF cumulative return over the same period is 11%.
Similarly, an Index (-1x) Inverse ETF will not give us the opposite of the cumulative return of the Underlying Index over a longer period:
Scenario 1:
5 days cumulative return comparison, index increases by 10% daily.
(-1)X Underlying Index cumulative return is -61% while Index (-1x) Inverse ETF cumulative return over the same period is -41%.
Scenario 2:
5 days cumulative return comparison, index decreases by 10% daily.
(-1)X Underlying Index cumulative return is 41% while Index (-1x) Inverse ETF cumulative return over same period is 61%.
Scenario 3:
5 days cumulative return comparison, index increases and decreases by 10% alternatingly.
(-1)X Underlying Index cumulative return is -8% while Index (-1x) Inverse ETF cumulative return over the same period is -12%.
In summary, we understand the compounding effect could potentially lead to deviations in cumulative returns between a leveraged ETF or inverse ETF with the corresponding multiples (2X for 2X leveraged ETF and -1X for Inverse ETF) of the underlying index’s cumulative return.
From the charts below, such deviation could at times benefit us. For example, in a trending market where market valuation is trending upwards or downwards, we tend to benefit from compounding effect either by gaining higher returns or suffering less losses. However, in a volatile sideway market, the compounding effect is likely to put us at a disadvantage, either causing us to earn less returns or inflicting greater losses as compared to a multiple of the underlying index’s cumulative return.
Disclaimer: the scenarios presented above are solely for illustration purposes only and does not take into account the impact of other factors (such as but not limited to management fees) on a fund’s performances. Actual performances of L&I ETF units with respect to their Underlying Indices might differ under similar scenarios.
iv. Placing of contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amount. Market conditions may not make it possible to execute such orders;
v. The leverage obtained from a leveraged ETF can work against you as well as for you. It could lead to large losses as well as gains;
vi. It is in the investor’s best interests to take effort to study all risks as contained in the prospectus of the L&I ETFs, including but not limited to interest rate risks, country risks, credit risks, foreign exchange risks, futures rollover risks, counterparty risks and liquidity risks; and
vii. If an investor engages in purchase of L&I ETF units using margin financing or short sale of L&I ETF units, he or she may gain higher profits when the price movement conforms to expectations, or may otherwise suffer bigger losses. An investor may also face a margin call by the lender if the collateral maintenance ratio drops.
3. This brief statement cannot disclose all the risks and other aspects of purchasing L&I ETF units. You should carefully study the requirements pertaining to L&I ETFs and the content of the prospectus of L&I ETFs before you decide to purchase. If you are in doubt in relation to any aspect of this statement or the terms of L&I ETFs, you should seek independent professional advice before you decide to invest.