Leverage products: Seizing Opportunities, Managing Risks

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  Serge Nussbaumer
  Chefredaktor

The first few months of the stock market year 2025 were a rollercoaster ride – there was not a dry eye in the house. Especially since Donald Trump took back the helm in the White House, market sentiment seems to be characterized by a constant rollercoaster ride. No president before him has issued so many decrees in his first 100 days, some of which have caused considerable uncertainty. In addition, he has unleashed a veritable tsunami of tariffs on the global economy. As a result, the S&P 500 has lost around 8% since then – the worst stock market start to a US presidency since Richard Nixon’s second term in 1973.

New player

The wild ups and downs on the financial markets could continue for a while yet, as neither the customs chaos has been resolved nor are the current economic data giving cause for euphoria. Such a volatile environment attracts traders in particular, which is clearly reflected in the trading figures. In the first quarter of 2025, leveraged products with a volume of around CHF 1 billion were traded on SIX, which corresponds to an increase of almost 50% compared to the previous year. Issuers were also very active. Not only has the variety of underlyings increased, but also the number of providers. With Leonteq, a new provider has recently entered the market for leverage products. The motto here is: get it right, don’t get it wrong. The FinTech company currently has almost 3,200 leverage products listed on SIX, making popular underlyings such as Renk, Rheinmetall and Hensoldt leveraged investable in Switzerland for the first time. “We are aiming for a broadly diversified universe of underlyings – from established equities and indices to niches that have hardly been covered to date but are in high demand,” says derivatives specialist Manuel Dürr from Leonteq in an interview (payoff magazine April 2025) with Serge Nussbaumer from payoff.

Popular trading instruments

The entire product offering on SIX Swiss Exchange also developed positively. At 14,472, the number of new listings in March was above the average for the last 12 months. Leveraged products now account for 78.4% of the market for structured products. Trading turnover also increased by almost a tenth to CHF 333.51 million. Bank Vontobel once again defended its leading position with a relative share of over 54%. It was followed by UBS (20.3%), ZKB (13.1%) and Bank Julius Baer (10.5%). Overall, the top quartet has a turnover share of around 98%. Leonteq wants to roll up the field from behind. “2025 will be all about expansion: we are planning to significantly expand our offering – with additional underlyings, new asset classes and further product types,” says Dürr, a specialist in structured products, who is keen to expand.

Warrants are currently the most popular leverage variant among products. At the beginning of the year, warrants took the top spot in the ranking and were able to defend this with a current market share of just under 44%. Although mini futures “only” account for a quarter of the trading volume, they recorded the highest growth in March with an increase of 65%. Meanwhile, knock-out warrants account for one-fifth and constant leverage certificates occupy the remaining tenth.

But what is the fascination of leverage products?

Leverage products make it possible to participate disproportionately in price movements – for example of a share, an index or a commodity – with a small amount of capital. They are often used for short-term speculation with little capital or to hedge a portfolio. However, what at first glance looks like a turbo for the portfolio can quickly become a risk without sound knowledge. The key feature is leverage. This amplifies both profits and losses. Put simply, it describes the ratio in which the price of the leverage product changes compared to the underlying asset. An example: If a share rises by 2% and the leverage product has a leverage factor of 5, this results in a profit of 10% – simplified calculation. However, the effect works in both directions: If the share falls by 2%, the product also loses 10%. The stake can therefore fluctuate considerably or, in the worst case, be lost completely.

Feeling the tooth

If you are aware of the risk and have a clear market expectation, you can achieve high returns from short-term trends or fluctuations without having to invest large sums of money. Rapid movements, such as the publication of quarterly figures or macroeconomic data, can be exploited. But there are also plenty of pitfalls. In addition to the risk of a knock-out, such as mini-futures, leading to a total loss, the terms and conditions of purchase can also differ from issuer to issuer. We have therefore taken a close look at the financing costs of the products and the information on market quality (PMMI). With its three calculation parameters – availability of quotes, volume and spread – the PMMI provides a rough overview of the market making quality. The following applies: values above 80 points are sufficient, values below 80 points are not sufficient.
Our current analysis shows that issuers are doing a good job overall in the interests of investors. Bank Julius Baer was at the top of the list for many months. With just under 10,000 listed products, the bank has an excellent market making score of 98.16. Excitingly, newcomer Leonteq took the top spot by a wafer-thin margin with 98.22 points.

In the case of leveraged products such as mini futures, financing costs also play a key role in addition to leverage, as the value of the product falls continuously as the financing level increases. These costs include not only the issuer’s fees, but also the expenses for credit financing. Due to the open-end structure, the financing level is adjusted daily – the pro rata financing costs are priced in on an ongoing basis. The barrier is also adjusted daily by the same amount so that the financing level does not gradually approach the stop-loss mark, but remains at a constant distance.

As part of a comprehensive analysis of around 10,000 products, one underlying security each was selected for Switzerland, Germany and the USA. The selection was made at random on the condition that all six issuers of leveraged products listed on SIX are represented. Novartis, the DAX and Nvidia were chosen. The three tables above show the average financing cost rate of all long mini-futures and long knock-out warrants on these underlyings traded on SIX on April 14 and 15, 2025. The presentation is per issuer and is sorted by decreasing financing costs. The values are shown as a percentage per year.