The Daily Compounding Effect

Transcription

1 The Daily Cmpunding Effect Intrductin This factsheet is intended as a summary t explain the effects f daily cmpunded returns fr Bst Shrt and Leveraged ETPs. Further infrmatin is prvided in the Prspectus f Bst Issuer PLC within the Risks sectin and als the sectin titled Ecnmic Overview f the ETP Securities. The key factrs f cmpunding are; Investment returns fr perids lnger than ne day are affected by cmpunding Daily cmpunding can have either a psitive r negative effect n returns Fr perids lnger than ne day, daily cmpunded returns may nt be equal t an unleveraged return (r the benchmark index) multiplied by the leverage factr A trending market (upwards r dwnwards) will result in returns which appear t utperfrm High vlatility r a sideways trending market will result in returns which appear t underperfrm The cmpunding effect increases with higher vlatility, greater leverage and lnger hlding perids Daily Rebalancing Bst Shrt and Leverage Daily ETPs are designed t track either a leveraged index r unleveraged index. In either case, the daily return is multiplied by the leverage factr n each day. Other frequencies f re-balancing culd be used but the actual leverage an investr wuld be expsed t wuld depend at what pint f time they bught the investment. Daily leverage simplifies this issue as n each day, the leverage is cnstant. With daily rebalancing, investment returns fr perids f mre than ne day will be affected by the cmpunding effect. Cmpunding f Daily Returns A bank accunt that cmpunds interest at 1% every mnth, will end the year with mre than 12% cmpunded interest earned 1. In the same way, investment returns ver a perid lnger than ne day are affected by the cmpunding f daily returns. Daily cmpunding may lead t returns that are greater r less than the sum f the individual daily returns and which may nt be expected by an investr wh is nt familiar with cmpunding r daily cmpunding f leverage returns. The cmpunding effect can psitively enhance returns in trending markets (upward r dwnward) whilst negatively impacting returns when the markets are mre vlatile r trend sideways fr lng perids. The effect f this cmpunding will be further amplified when daily returns are leveraged. The fllwing pages prvide theretical and real examples t illustrate the effects f daily cmpunding and leverage in trending and vlatile markets. Data & Methdlgy Fr simplicity, the examples and simulatins cntained in this dcument ignre the effect f fees and adjustments which are deducted frm the actual ETPs n a daily basis. If yu wuld like further infrmatin abut Bst ETP s prduct range r any f the cntent within this fact sheet, please inf@bstetp.cm, r call +44 (0) % interest cmpunded mnthly ver 12 mnths wuld result in cmpunded interest f (1+1%) 12-1=12.7%, assuming the interest payments are reinvested at the same interest rate. +44 (0) inf@bstetp.cm

2 Cmpunding Effect Theretical Examples The effects f cmpunding in Shrt and Leveraged ETPs may be magnified by higher vlatility r lnger hlding perids. The belw theretical scenaris demnstrate this: Daily Returns Upward Trend Daily Returns Dwnward Trend Daily Returns Vlatile The index increases by 2% each day ver an 11-day perid. An investr may expect the index t be up 22% (11 x 2%), hwever the cumulative return exceeds this at 24.3%. A Bst 3x Leverage Daily ETP may be expected t be up 66% (3 x 22%) r even 72.9% (3 x 24.3%), hwever, due t daily cmpunding it exceeds bth and is up nearly 9. Similarly, a Bst 3x Shrt Daily ETP may have been expected t be dwn 66% r even 72.9%, hwever it is dwn nly 49.4%. The index decreases by 2% each day ver an 11-day perid. An investr may expect the index t be dwn 22% (11 x -2%), hwever the cumulative return is less at %. A Bst 3x Shrt Daily ETP may have been expected t be up 66% (=3 x 22%) r 59.7% (= 3 x 19.9%), hwever, due t daily cmpunding it exceeds bth and is up nearly 9. Similarly, a Bst 3x Leverage Daily ETP may have been expected t be dwn 66% r even 59.7%, hwever it is dwn nly 49.4%. The index increase by 2% and then decreases by 2% the next day fr 11 days. An investr may expect the index t be up 2% (2% - 2% + 2% - 2% ), hwever the cumulative return is less at 1.8%. A Bst 3x Leverage Daily ETP may have been expected t be up 6% (3 x 2%) r even 5.4% (3 x 1.8%) hwever due t daily cmpunding it is up nly 4.1%. Similarly, a Bst 3x Shrt Daily ETP may have been expected t be dwn 6% r even 5.4%, hwever it is dwn 7.7%. +44 (0) inf@bstetp.cm

3 Cmpunding Effect - Simple Tw-Day Scenaris The fllwing scenaris illustrate hw trending markets and vlatility affect cumulative daily returns ver a 2-day perid. Each example shws the cumulative perfrmance f the underlying index and a Bst 3x Leverage Daily ETP, which prvides 3x the daily return f the underlying Index. Daily Returns Upward Trend Daily Returns Dwnward Trend Daily Returns Vlatile The underlying index value rises 1% n day ne and rises again by 1% n day tw. be 2%, whereas the cumulative return f the index is 2.01%. The cmpunding effect has utperfrmed the sum f daily returns. The Bst Leverage Daily ETP rises 3% n day ne and rises again by 3% n day tw. prduce 3x the cumulative return f the index i.e. 6.03% (3 x 2.01%) whereas the cumulative return f the Leverage Daily ETP is 6.09%. In an upward trending market, the cumulative daily return will utperfrm the sum f psitive daily returns. Leverage expsure will magnify the cmpunding effect and is reflected in increased utperfrmance. The underlying index value falls 1% n day ne and falls again by 1% n day tw. be -2%, whereas the cumulative return f the index is %. The cmpunding effect has utperfrmed the sum f daily returns. The Bst Leverage Daily ETP falls 3% n day ne and falls again by 3% n day tw. prduce 3x the cumulative return f the index i.e % (3 x -1.99%) whereas the cumulative return f the Leverage Daily ETP is 5.91%. In a dwnward trending market, the cumulative daily return will utperfrm the sum f negative daily returns. Leverage expsure will magnify the cmpunding effect and is reflected in increased utperfrmance. The underlying index value rises 1% n day ne and falls by 1% n day tw. be, whereas the cumulative return f the index is %. The cmpunding effect has underperfrmed the sum f daily returns. The Bst Leverage Daily ETP rises 3% n day ne and falls again by 3% n day tw. prduce 3x the cumulative return f the index i.e % (3 x -0.01%) whereas the cumulative return f the Leverage Daily ETP is 0.09%. In a vlatile market, the cumulative daily return will underperfrm the sum f daily returns. Leverage expsure will magnify the cmpunding effect and is reflected in further underperfrmance. Upward Trend Index Return 3x Leveraged Daily ETP Dwnward Trend Index Return 3x Leveraged Daily ETP Vlatile Index Return 3x Leveraged Daily ETP Day 1 Return (in pints / ) +1% (1) +3% ( 3) Day 2 Ending Value Day 2 Return (in pints / ) +1% (1.01) +3% ( 3.09) Day 2 Ending Value Cmpunded 2-Day Return 2.01% 6.09% Day 1 Return (in pints / ) -1% (-1) -3% ( -3) Day 2 Ending Value Day 2 Return (in pints / ) -1% (-0.99) -3% ( -2.91) Day 2 Ending Value Cmpunded 2-Day Return -1.99% -5.91% Day 1 Return (in pints / ) +1% (1) +3% ( 3) Day 2 Ending Value Day 2 Return (in pints / ) -1% (-1.01) -3% ( -3.09) Day 2 Ending Value Cmpunded 2-Day Return -0.01% -0.09% +44 (0) inf@bstetp.cm

4 Cmpunding Effect - Histrical Examples The belw examples demnstrate hw a Bst 3x Shrt Daily ETP and Bst 3x Leverage Daily ETP perfrmed in relatin t their underlying nn-leveraged index in varius scenaris. The histrical data illustrates hw vlatility can impact returns ver a hlding perid lnger than ne day (in the examples belw, a six mnth perid is shwn). Trending Upward Market In a trending rising market bth a 3x Shrt Daily ETP and a 3x Leverage Daily ETP tend t utperfrm the nn-leveraged index return multiplied by the leverage factr. The six-mnth cumulative return f the Eur STOXX 50 NR index ending 28 th August 2009 was +55%. The 3x Leverage Daily ETP was up 224% ver the same perid and nt 165% (3 x 55%), exceeding 165% by 59%. The 3x Shrt Daily ETP was dwn 8 ver the same perid and nt -165% (3 x -55%), representing a multiple f -1.45x the perfrmance f the index. Trending Dwnward Market In a trending falling market bth a 3x Shrt Daily ETP and a 3x Leverage Daily ETP tend t utperfrm the nn-leveraged index return multiplied by the leverage factr. The six-mnth cumulative return f the Eur STOXX 50 NR index ending 27 th Octber 2008 was -4. The 3x Shrt Daily ETP was up 202% ver the same perid and nt 12 (3 x 4), exceeding 12 by 82%. The 3x Leverage Daily ETP was dwn 83% ver the same perid and nt -12 (3 x -4), representing a multiple f 2.1x the perfrmance f the index. Vlatile Market In a vlatile market bth a 3x Shrt Daily ETP and a 3x Leverage Daily ETP tend t underperfrm the nnleveraged index return multiplied by the leverage factr. The six-mnth cumulative return f the Eur STOXX 50 NR index ending 29 th January 2009 was -3. The 3x Shrt Daily ETP was up 43% ver the same perid and nt 9 (3 x 3). The 3x Leverage Daily ETP was dwn 78% ver the same perid and nt 9 (3 x -3), representing a multiple f 2.6x the perfrmance f the index. 2 Bst EURO STOXX 50 3x Leverage Daily ETP Eur STOXX 50 NR Bst EURO STOXX 50 3x Shrt Daily ETP 224% 2 Bst EURO STOXX 50 3x Leverage Daily ETP Eur STOXX 50 NR Bst EURO STOXX 50 3x Shrt Daily ETP 1 Bst EURO STOXX 50 3x Leverage Daily ETP Eur STOXX 50 NR Bst EURO STOXX 50 3x Shrt Daily ETP % % 55% % - -78% In all the abve examples, the Bst 3x Leverage Daily ETP and Bst 3x Shrt Daily ETP has perfrmed as it was designed t perfrm. The investr shuld make sure t understand the cmpunding effect as it relates t investments in general, Shrt and Leveraged ETPs in particular. +44 (0) inf@bstetp.cm

5 Abut Bst ETP Bst is an independent butique ETP prvider, ne f few independent prviders f specialised Exchange Traded Prducts (ETPs) in the Eurpean market and is the first t fcus n 3x Leveraged and 3x Shrt ETPs. Bst brings smething new t the Eurpean market with the aim f adding value t investrs. This is in cntrast t the brad 'supermarket' fferings that the majrity f ETP Issuers prvide tday. Bst's ffering targets sphisticated investrs including day traders, stck brkers, wealth managers, high frequency traders and institutinal investment managers. Bst's main selling pints include: Independent - Bst is an independent butique ETP prvider. Bst is independent frm any investment bank, swap prvider, market maker, trustee, and custdian. As a result, investr s interests are aligned with Bst. Best f breed Bst s funders have ver 20 years f experience in the ETP market. With that experience, plus the wealth f experience prvided by Bst s wrld class service prviders, investrs are able t enjy efficient prducts with liquidity, strng cunterparty risk management and relatively lw csts. Transparent Bst disclses all fees, cllateral hldings and details n its website each day. Innvative and nimble - Bst aims t be a leader in innvatin. This will be evidenced by the ETPs issued, as well as the prduct develpment and market research behind the prducts. Fcused and specialised - Bst's strategy differs frm the incumbent ETP issuers by nt fcusing n being everything t everyne. Educatin - Bst will fcus n prviding all the educatinal and thught leadership tls needed by investrs. Cntact Us If yu wuld like further infrmatin abut Bst ETP s prduct range r any f the cntent within this fact sheet, please inf@bstetp.cm, r call +44 (0) Disclaimer This cmmunicatin has been prvided by Bst ETP LLP which is an appinted representative f Mirabella Financial Services LLP which is authrised and regulated by the Financial Cnduct Authrity. The prducts discussed in this dcument are issued by Bst Issuer PLC (the Issuer ) under a Prspectus apprved by the Central Bank f Ireland as having been drawn up in accrdance with the Directive 2003/71/EC. The Prspectus has been passprted frm Ireland int the United Kingdm and is available n the websites f the Central Bank f Ireland and the Issuer. Please read the Prspectus befre yu invest in any Exchange Traded Prducts ( ETPs ). Neither the Issuer nr Bst ETP LLP is acting fr yu in any way in relatin t the investment t which this cmmunicatin relates, r prviding investment advice t yu. The infrmatin is nt an ffer t buy r sell r slicitatin f an ffer t buy r sell any security r investment. Yu are advised t seek yur wn independent legal, investment and tax r ther advice as yu see fit. The value f an investment in ETPs may g dwn as well as up and past perfrmance is nt a reliable indicatr f future perfrmance. An investment in ETPs is dependent n the perfrmance f the underlying index, less csts, but it is nt expected t match that perfrmance precisely. ETPs invlve numerus risks including amng thers, general market risks relating t the relevant underlying index, credit risks n the prvider f index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflatinary risks, liquidity risks and legal and regulatry risks. ETPs ffering daily leveraged r daily shrt expsures ( Leveraged ETPs ) are prducts which feature specific risks that prspective investrs shuld understand befre investing in them. Higher vlatility f the underlying indices and hlding perids lnger than a day may have an adverse impact n the perfrmance f Leveraged ETPs. As such, Leveraged ETPs are intended fr financially sphisticated investrs wh wish t take a shrt term view n the underlying indices. As a cnsequence, Bst ETP LLP is nt prmting r marketing Bst ETPs t Retail Clients. Investrs shuld refer t the sectin entitled "Risk Factrs" and Ecnmic Overview f the ETP Securities in the Prspectus fr further details f these and ther risks assciated with an investment in Leveraged ETPs and cnsult their financial advisrs as needed. This marketing infrmatin is derived frm infrmatin generally available t the public frm surces believed t be reliable althugh Bst ETP LLP des nt warrant the accuracy r cmpleteness f such infrmatin. All registered trademarks referred t herein have been licensed fr use. Nne f the prducts discussed abve are spnsred, endrsed, sld r prmted by any registered trademark wner and such wners make n representatin r warranty regarding the advisability n dealing in any f the ETPs. +44 (0) inf@bstetp.cm