- Effective from 7 Nov, SGX is launching Long and Short 5x Daily Leveraged Certificates (DLCs) on DBS, OCBC, UOB, Singtel, Keppel Corp and Venture stocks. DLCs will also be available on four HKEx-listed stocks – Tencent, Ping An, CNOOC and PetroChina.
- The DLCs offer a lower cost alternative to gain exposure to the blue chips stocks as compared to buying them directly. Other benefits include never losing more than the invested capital and transparent linear pricing, i.e. a 1% move in the stock translates into a 5% move in the 5x DLC.
- DLCs are generally designed for short term trading, with typical holding periods ranging from intra-day to five trading sessions. When holding the DLCs for more than a day, the effect of compounding will apply which can work for or against the investor.
Daily Leverage Certificates (“DLCs”) are financial instruments issued by a third-party financial institution, in this case Societe Generale, and are traded on the SGX securities market. DLCs seek to achieve short-term investment results that correspond to the daily magnified performance of the underlying index or stock.
Since the launch of DLCs on 17 July 2017, the DLCs listed for trading in Singapore have been based on Asian indices – the MSCI Singapore Index and Hang Seng Indices. With effect from 7 November 2018, DLCs on six SGX-listed stocks and four HKEx-listed stocks will be listed for trading.
The six Singapore stocks are DBS, OCBC, UOB, SingTel, Keppel Corp and Venture. The four HKEx listed stocks are Tencent, Ping An, CNOOC and PetroChina. The performance of each of these stocks will be tradable via a 5x Long and 5x Short DLCs.
DLCs offer a cheaper alternative to gain exposure to blue chip stocks
The Single Stock DLCs will be priced between S$0.25 to S$2.20 depending on the underlying stock. This means that investors can gain 5x leverage exposure to the underlying stock at a fraction of the cost.
Taking Tencent for example and assuming Tencent is currently at HKD285 (S$50), the investor would need capital of S$5,000 (S$50 x min lot size 100 units) to gain exposure to Tencent as compared to a capital of S$220 (S$2.20 issue price of the Tencent DLC x min lot size 100 units) if the investor uses the DLC.
In addition to a lower capital outlay, the intraday trading costs for DLCs is cheaper than trading the stock, as illustrated in the example below for an investor who wishes to gain S$10,000 worth of exposure to Tencent:
Other benefits of DLCs include:
1) Ability to take a bearish position on the underlying stock using the short DLCs;
2) No margins hence investors will never lose more than their invested capital; and
3) Clear and transparent linear pricing, i.e. if the underlying stock moves by 1% from its closing price of the previous trading day, the value of the 5x DLC will move by 5% before cost and fees.
Trading the DLCs Intraday
While the expiry date of Single Stock DLCs above will be in three years, i.e. 5 November 2021, the DLCs are generally designed for short term trading, with typical holding periods ranging from intra-day to five trading sessions.
With five times leverage on the daily performance of the underlying stock, the DLCs provide investors with the ability to make enhanced returns within a short period of time but also the risk of substantial losses if the underlying stock moves against the investor.
The charts below illustrates the simulated returns of the 5x DLCs using historical daily return (close to close) of some of the underlying stocks. As seen in the chart, a 5x DLC on DBS produces a daily move of 5-10% while a 5x DLC on Tencent produces a daily move of 10-15% on average.
Holding the DLCs over a period of more than one day
If the trading horizon is over a few days, it is important to note that the performance of the DLC may vary from the leverage factor of the DLC. This is because the performance of the underlying asset and the DLC is reset at the end of each trading day.
Daily reset feature results in a compounding effect
- When extending the holding period beyond one trading session, investors should take note that the DLC performance for each day is locked in, and any subsequent returns are based on what was achieved the day before. This is known as the ‘compounding effect’.
- Conceptually, if a stock moves up say 1.0% for three consecutive trading sessions, the net effect would be a return of 3.03% for the stock. For a 5x Long DLC, its return would not be 3.03% x 5 = 15.15%, rather it would be 15.76% (more than five times). This is due to the compounding effect. Each day, the previous day’s value and gains are again invested with a leverage factor of five.
- If a stock moved up say 5.0% on day one, was down 5.0% on day two, then up 5.0% on day three – the net effect would be a 4.7% gain for the stock. For a DLC based on these volatile stock moves, its return would not be 4.7% x 5 = 23.7%, rather it would be 17.2% (less than five times). The compounding effect of a DLC may not provide favourable returns when the price of the stock moves in a sideways pattern or when the DLC is held for long periods of time.
Please note the above are highly simplified examples to illustrate the effect of compounding on the performance of DLCs and emphasise the products’ application to short term traders rather than long-term investors. Investors should also note that funding costs are incurred when holding the DLC overnight.
DLCs are Specified Investment Products
DLCs are products with features that might be more complex in nature and are only suitable for investors who possess the investment knowledge of more complex products and have a high risk tolerance. Hence, all investors need to be qualified to trade in Specified Investment Products (“SIPs”) to be able to trade DLCs. Speak to your broker to find out more on how you can qualify to trade SIPs.
Where can I find more information?
Investors can find more resources on www.sgx.com/DLC or the issuer’s website www.dlc.socgen.com. Investors should also read all listing documents provided by the issuer for other features such as the airbag mechanism, the risks and other information related to the product before trading the DLCs. The listing documents can be found under “Company Information” on the SGX website or the issuer’s website.