The boom in Australian Securities Exchange (ASX)-listed exchange-traded funds (ETF) is being followed by a boom in leveraged products over ETFs.
RBS got a jump on the competition this week by launching seven self-funding instalment warrants over United States-listed iShares international equity ETFs, two over US-listed iShares bond ETFs and another over Berkshire Hathaway's Class B Shares.
RBS chose to offer ASX-listed instalments over US-listed ETFs with higher liquidity.
Macquarie last month launched MINI warrants over State Street's SPDR S&P/ASX 200 ETF, iShares' MSCI Emerging Markets ETF and BetaShares' fast-growing Gold Bullion ETF, which is hedged for Australian-dollar movements.
Other issuers have launched warrants over ETFs.
CitiGroup unveiled its self-funding instalment over Russell Investments' High Dividend Australian Shares ETF in May.
RBS already has popular self-funding instalments over the State Street ASX 200, ASX 50, ASX 200 Property Fund ETFs, the MSCI Select High Dividend ETF, iShares High Dividend ETF and iShares ASX 20 ETF.
Westpac also has a self-funding instalment over the iShares ASX 20 ETF, which suits self-managed superannuation funds (SMSF) wanting leveraged exposure to Australia's largest 20 listed companies.
As the Australian ETF market grows, more geared products are expected to be issued.
"It really comes down to client demand," Macquarie derivative sales manager Donahue D'Souza said.
"The feedback we have had from financial advisers and retail investors is they want more options to gear over ETFs without being exposed to the risk of a margin call.
"It made a lot of sense to combine the MINI warrant structure with ETFs, given both products have continued to grow strongly in recent years."
A headwind against the launch of geared ETF products is the continuing share market volatility.
Reserve Bank of Australia data showed margin lending volumes continued to drift lower, with total margin lending of $19.2 billion in March 2011 down from a peak of $41.5 billion in December 2007.
Turnover in ASX-listed trading warrants and instalments is sharply lower since 2008.
Another issue is whether structured products over ETFs make more sense than using margin loans over them.
"I'm a big fan of ETFs and they are clearly a growth category that is here to stay, but I am not convinced about the benefits of wrapping another layer around an ETF through a structured product," Leverage Equities technical and research senior manager Julie McKay said.
"It is not always clear where the fee for the cost of protection is embedded in the structured product over the ETF. I can't see why you would use a structured product over an ETF, in preference to a margin loan, outside the SMSF space."
The big advantage of instalment and MINI warrants is their ability to be used with SMSFs, provided they match the fund's objectives.
As limited resource loans, instalments are one of only a few ways for SMSFs to gear over equities.
ETFs are becoming more popular with SMSFs, thus providing another catalyst for product issuers to geared products, such as warrants, for the huge SMSF market.
McKay said margin loans over ETFs made more sense for investors using them outside an SMSF structure.
Leverage Equities has margin loans over nearly all ASX-listed ETFs.
"An instalment warrant does not have a margin call, but investors are paying for that protection in the instalment's embedded optionality," McKay said.
"Or they might use a warrant that has an inbuilt 'stop loss' feature, which is effectively a margin call anyway, and risks crystallising losses if the market gaps lower.
"We believe investors can substantially reduce the risk of a margin call by having a sensible level of gearing over an ETF in the first place. They do not need to pay for that extra protection and use a structured product that wraps another layer around an ETF."
