ISA: How to spice up your tax efficient wrapper
You only have to look at the sheer volume of active retail clients in Contracts for Difference product, some 125,000 in 2016, to see that there are many investors who seek leverage exposure in their investment portfolio.
However sophisticated UK investors seeking leverage in their tax-exempt Individual Savings accounts (ISAS) and Self Invested Personal Pension (SIPP) savings plans are limited for choice.
For example, you cannot hold a Contract for Difference, which includes actual CFD’s and spread bets, in your ISA. Spread betting is also barred from SIPPs, and UCITS (Undertakings for Collective Investment in Transferable Securities) funds put severe constraints on the use of leverage, limiting to two times.
For the record, ISAs allow investors to put aside £20,000 over the next financial year, on top of money already saved. The lifetime allowance for a SIPP is £1 million.
But if you are seeking leverage in your investments portfolio one potential solution you can use within your ISA are Leveraged Exchange Traded products (ETP’s) - which typically apply 2, 3 or 5 times leverage to assets, or indices – which are admissible within an ISAs and SIPPs. Societe Generale’s newly-launched ETPs for example offer over 70 ETP products, both long and short, traded on the London Stock Exchange.
Using short-term market movements to generate excess returns – known as ‘overlay’ trades in institutional circles - is an interesting way to diversify investment exposures. Day to day returns can be respectable although the returns you can get from a Leveraged ETP exposure can be stellar, if you have the skill to take advantage of periods of volatility.
Now hindsight is a wonderful thing, but by way of example, the FTSE 100 has given plenty of opportunities for significant positive returns over the last few months.
During the market turmoil on 29th January through to 6th February, where the FTSE 100 fell 6.91%, the SG FTSE x5 DAILY SHORT (epic code SG87) produced a return of +39.47%. Had you captured the subsequent 1.93% rebound on 7th February, the SG FTSE x5 DAILY LONG (epic code SG86) would have produced +8.39% return.
Similarly with the more prolonged correction in the FTSE we have seen over the last month, there have been many opportunities to use leverage to enhance returns, the 6.91% gains in the FTSE 100 over April for example, delivered a +38.63% return in the SG FTSE x5 DAILY LONG.
Sophisticated users of Leveraged ETPs through their SIPPs or ISAs may lack the resources of large hedge funds that would typically place long or short bets through futures. But with leveraged ETP’s they have a highly liquid asset, traded on an Exchange such as the LSE, at their disposal.
Leveraged ETPs are an easy ways to express a view of the market on a daily basis. And tax relief, delivered through your ISA or SIPP wrappers, can make the argument for using them compelling still.
But remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.
Post by: Zak de Mariveles, Head of UK Exchange Traded Products
1 FCA Consultation Paper CP16/40
ETPs ISA tax
Risk Warning: Short & Long Leveraged ETPs are suitable for sophisticated retail investors. Both gains and losses will be accelerated in comparison to a direct investment in the underlying asset.
Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof, which changes could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied upon. The tax treatment of investments will, amongst other things, depend on an individual's circumstances. Investors must consult with an appropriate professional tax adviser to ascertain for themselves the taxation consequences of acquiring, holding and / or disposing of any investments mentioned in this news.