The S&P 500 index declined by 9.3% in September, making it one of the worst monthly declines since the Covid-19 pandemic rout in March where the index fell by 12.5%. Similarly, the Nasdaq 100 index and Dow Jones index declined by 10.6% and 8.8% respectively in the month of September, with all three indices registering a new low for the year.
As the current bear market swings into higher gear, stock market volatility has increased. The S&P 500 Index average daily movement has exceeded +/–2% in more instances this year compared to last year (see Chart 1). The increased volatility has been observed for the Nasdaq 100 Index and Dow Jones Index as well.
Generally speaking, the higher the volatility and therefore the risk, the greater the potential reward (or loss) to investors. It would therefore not come as a surprise that the US market has seen increased trading volumes on leveraged long/short products such as Leverage and Inverse ETFs (L&I ETFs) in the US that provide three times long and short exposure on the daily performance of these US indices. For example, the trading volume on the Proshares UltraPro Short S&P 500 that offers three times inverse leverage on the S&P 500 index has tripled in 2022 year to date compared to the same period last year.
Launch of 5x/7x Long and Short DLCs on US equity indices on SGX
To provide investors with a listed instrument on SGX that offers leverage long and short exposure on the US equity indices, Societe Generale has expanded the Daily Leverage Certificates (DLCs) product range this year to include the S&P 500, Nasdaq 100 and Dow Jones indices.
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These DLCs offer long and short exposure with five or seven times leverage on the daily performance of the underlying US equity index, on a closeto-close basis. As an illustration, if the S&P 500 index gains by 2% from its previous close, the 5x Long DLC will gain in value by 10% while the 5x Short DLC will fall in value by 10% (before applicable cost & fees are factored in) from its previous close, and vice versa if the S&P 500 instead falls by 2%. The payoff of the DLCs is similar in most aspects to that of the L&I ETFs found in the US market where the leverage is fixed daily.
As the DLCs are listed on the Singapore Exchange (SGX), they can be traded via a stock brokerage trading account and are denominated in Singapore dollars.
Traded during SGX market hours only
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The US indices DLCs can only be traded during SGX market hours from 9am to 5pm, where Societe Generale as the designated market maker will provide continuous bid and offer quotations on the DLCs. As the US market is closed during this period, the DLCs intraday price movements will be closely linked to the performance of the e-mini S&P 500, Nasdaq 100 & Dow Jones Futures respectively, during Asian hours, and are not the underlying assets of the DLCs.
Overnight when the US market is open, the US indices DLCs will track the respective underlying US equity indices with the fixed leverage performance. However, the DLCs cannot be traded as the SGX market is closed. The DLCs may potentially be useful for investors looking to hedge their portfolio or get in ahead of the US market open in the case of any high-impact news during Asian hours. They should also be comfortable with the fact that they are unable to manage their positions during US market hours.
Recent performance of the DLCs in September
In line with the sharp market declines in September, the Short DLCs on the US indices recorded increased gains while the Long DLCs recorded similar increased losses (see Chart 2 and 3). The 5x Short S&P 500 DLCs gained in value by 55% on the back of a 9.3% decline on the S&P 500 index while the 5x Long S&P 500 DLCs fell in value by 41%. The 5x Short Nasdaq 100 DLCs gained in value by 62% on the back of a –10.6% decline on the Nasdaq 100 index while the 5x Long Nasdaq 100 DLCs fell in value by –47%.
The DLCs perform best in a strong trending market due to the compounding effect feature where the daily gains and losses on the DLCs are locked in. As seen in the performance snapshot above, the 5x Short DLCs on the S&P 500 and Nasdaq 100 indices gained more than five times the performance of the underlying index over the one-month period due to the compounding effect. However, it is important to note that compounding effect can negatively impact returns when are markets more volatile or trend sideways for long periods.
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Leverage risks
As the saying goes, leverage is a double-edged sword. DLCs can amplify your potential returns but also your losses if the market moves against you, therefore it is important that investors understand and are comfortable with the risk they are taking on before initiating a position.
Over 250 DLCs have been issued by Societe Generale and listed on SGX, including DLCs that track indices such as the S&P 500 Index, Hang Seng Index, Straits Times Index, and a wide range of single stocks. Visit Societe Generale’s website at DLC.socgen.com to learn more about the product features including the associated risks of trading the DLCs.
Marcus Ng is vice-president of cross asset listed distribution, Asia Pacific, at Société Générale
Disclaimer: This article is brought to you by Société Générale, Singapore Branch which is regulated by the Monetary Authority of Singapore (MAS). The content of this article does not form part of any offer or invitation to buy or sell any DLCs, and nothing herein should be considered as financial advice or recommendation. Investments in DLCs carry significant risks, the price may rise and fall in value rapidly and holders may lose all of their investment. Any past performance is not indicative of future performance. The DLCs are for specified investment products (SIP) qualified investors only. This advertisement has not been reviewed by the MAS.
