Daily leverage certificates take spotlight amidst heightened market volatility

The 7x Short SiMSCI DLC gained 387% on the back of the index’s decline.

The heightened market volatility has put daily leverage certificates (DLCs) in the spotlight, presenting opportunities for investors to carry out “swing trades,” according to an SGX report.

The turnover levels for DLCs hosted in Singapore Exchange (SGX) tripled from a year ago. It has also witnessed 50% more active participants. In March, the three most traded Index DLCs were: 7x Short Hang Seng Index (HSI) DLC, 5x Short MSCI Singapore Index (SiMSCI) DLC, 7x Short SiMSCI DLC

Turnover activity for DLCs in March was also mainly focused on the Short DLCs. DLCs on HSI, SimSCI and Hang Seng China Enterprises Index (HSCEI) underlying saw 66-85% of their turnover in the Short DLCs.

In SiMSCI, the 7x Short DLC gained 387% between 28 February and 19 March on the back of a 24% decline on the index, which is 16 times the performance of the underlying index. This disproportionate return is due to the positive compounding effect.

Compounding occurs when the performance of an underlying asset and DLCs are measured from the intrinsic closing levels recorded the previous day when markets open the next day. This meant that the performance for each day is locked in, and subsequent returns come on top of it.

However, following the sharp rebound after 19 March, the compounded return would have eroded to a gain of 56%, less than seven times the performance of the underlying index if held since 28 February.

Still, the recent rebound offered opportunities for a swing trade, as the 7x Long SiMSCI DLC gained 116% between 23 March and 27 March, slightly more than seven times the performance of the index’s 14% gain.

SGX hosts the trading of 20 DLCs on three developed market indices, namely SiMSCI, HSI and HSCEI, with leverage levels of three, five or seven times.

Besides Index DLCs, there are also 76 DLCs on Singapore and Hong Kong stocks, including the three local banks, Venture, Tencent, and Geely Automobile. The single stock DLCs provide 5x leverage on the daily performance of the underlying stock.