Leveraged index ETFs (LETF) in Indian stock market

General
1

Hi guys,

The US market has leveraged products for their indices. These products are called “Leveraged ETFs” or LETFs.

LETFs basically provide a multiple of leverage over the index returns. For eg:

  • QLD gives 2x leveraged returns over the Nasdaq100 index (QQQ)
  • TQQQ gives 3x on Nasdaq100

Now, coming back to Indian markets, I couldn’t find such products. I know that we have index ETFs like NIFTYBEES and BANKBEES that reflect the performace of Nifty50 and NiftyBank but those are not leveraged.

I am trying to figure out a way to take a leveraged position in say Nifty 50 which will mimic 2/3x the performance of Nifty 50 index.

Trading in Index futures does given an option to get leverage but futures positions are time bound i.e. they need to be rolled over each month and that incurs transaction costs and tax liabilities.

Is there a way I can take a leveraged position in an index and hold it over long-term?
@nithin @siva @Meher_Smaran @Jason_Castelino

PS: I know the downsides of volatility decay over leveraged products.

1 Like
2

Get a synthetic future using long term options.
If you wanna buy nifty you can sell 26000 put and buy 26000 call of may be Dec 2026 or even beyond.

3

Hi @Jason_Castelino thanks for your reply.
For long-term options I don’t really see much volumes as can be seen in the screenshot below. This can create liquidity issues. Is there any other method?

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4

Possible alternative is to use MTF. Still, yeah. There is a cost.

5

Hi @nithin_kumrr can you help me understand how would MTF be used to achieve this?

6

@Shashank_Shirke MTF allows you to buy more shares by paying part of the total amount while the broker funds the rest. Interest is charged daily on the funded amount. Check out this support article, explained with an example: Margin Trading Facility (MTF) FAQs

Btw, we are currently testing this with a small set of users.

7

Thanks for the reply @nithin_kumrr but like you already said, MTF will come with an interest cost attached to it. What I am looking for is a more straightforward way to get into a leveraged position in index funds.

8

Have you considered buying Index futures and rolling them over every month?

Also the synthetic future has liquidity issue only if the timeframe is extremely long. You can consider creating a synthetic 6 months away (eg for May 2025 now) which will be much more liquid and probably have no liquidity issues from around November

9

Hi @Vai_Mat yes that’s what I have been doing so far but like I mentioned in my first post this monthly rollover process is a bit tedious as it has tax implications and also adds up transaction costs and also some premium opportunity cost.

I tried looking into it but even 6 months away synthetic future has considerable liquidity issues. Infact, Zerodha has specifically mentioned this issue about long dated contracts in one of their support articles here.

I am looking for a simpler way to achieve this.

10

If you are taking a leveraged position then in one way or the other you have to pay some cost for taking that leverage. Either it’s the interest cost in futures (which is the roll over cost) or charges of MTF or the difference in premiums when you create synthetic.
Why would someone provide you free leverage? Or who pays for the leverage you take?

Wrt liquidity of long term options; yes they have limited liquidity 6 months away but ATM options are generally available to trade.
If you are planning to mimic a future and hold on to this, as you are looking at long term gains while also benefiting from leveraging then liquidity issue does not really arise unless you are planning to take a position that is more than 150-200 lots

11

The way the leveraged ETFs like QLD, TQQQ that I mentioned in the very first post, are designed are not leverage/margin in the traditional sense but instead they mimic the underlying index performance by a multiple like 2x or 3x.

Of course, they have a higher expense ratio as compared to the underlying index (0.20% vs 0.80%) but that is still negligible as compared to the cost of traditional line of margin offered by brokers or the transaction costs and tax implications associated with rolling over monthly futures.

I am wondering if Indian market regulators would allow such in-built leveraged ETFs on indices. Currently, I don’t see a cost-tax-efficient way of taking a long-term leveraged position in an index like Nifty.

12

Okay, so after a bit of research I figured out that there is a 2x leveraged index provided by NSE and it’s called the Nifty50 TR 2x Leverage index

https://www.niftyindices.com/indices/equity/strategy-indices/nifty-50-tr-2x-leverage

This index aims to give a 2x daily return of the Nifty50 index.

Now my question is, how can we invest in this index? I could not find any ETF or mutual fund that provides access to this index.

@siva @nithin_kumrr @Jason_Castelino @nithin

1 Like
13

Hi @Shashank_Shirke
You can’t do a leverage index in India in the MF structure at all. MF regulation does not allow derivatives. Only rebalancing is allowed and has to be justified. There is a concept called inverse ETF. It is like shorting the nifty 50 index; internationally, inverse ETF is allowed, but as of now, not in India. Recently, SEBi came up with a consultation paper where they are proposing to allow an inverse ETF, but that won’t have the leverage ones.

14

Hi @Neelesh
Thanks for the detailed reply. I understand that regulation does not allow leveraged indices but any idea what is the purpose of having a 2x leveraged index by NSE if it cannot be used? Is there any specific purpose for having such indices?