Spread betting instead of investing in funds?

glendale

Registered User
Messages
47
Another thread got me thinking about this, compare investing in a Quinn Life fund with a similar spread bet. As you are leveraged in the spread bet you can invest the left over money in a high interest deposit account. Here are the numbers:


Quinn
Buy 20k of EuroStoxx50 fund, say it goes up 10% in a year, then cash out.
You are left with a profit of 1370

22000 - 1%(annual charge)=21780 = gross profit of 1780 -23% Tax = 1370

Delta Index + Northern Rock
EuroStoxx50 on DI is about 4450 point currently so 10% represents 445 points if you stake 3 euro per point you would make 1335euro profit.
You would need 750euro (margin requirment x3) in your DI account . This leanes 19250 in NR for the year which will earn 693 (at 4.5% (866)-20%(173) tax) take away from this the cost to 4 spreads (4*2), so a risk free porfit of 685euro.

Have I missed anything?
 

samfarrell

Registered User
Messages
74
well with spreadbetting you never actually own a share, you just bet on the price movements on that share. plus you can lose everything if you dont have the funds to keep the margin open
 

glendale

Registered User
Messages
47
well with spreadbetting you never actually own a share, you just bet on the price movements on that share. plus you can lose everything if you dont have the funds to keep the margin open

In the example above your loses would be the exact same as if you owned the share.
Am I correct to say when you invest in a fund you don't actually own any shares in any of the companies that compose the fund?
 

ClubMan

Registered User
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44,339
Am I correct to say when you invest in a fund you don't actually own any shares in any of the companies that compose the fund?
Yes - you own units in a fund which owns the assets. You are investing indirectly in such assets and not directly. However with unit linked funds (unlike, say, tracker bonds) you normally benefit from dividend payments on the assets which are reinvested within the fund.

Is it relevant to consider the different tax treatment of spread betting and indirect equity investments? Perhaps it has been done in other threads on this subject?
 

glendale

Registered User
Messages
47
Is it relevant to consider the different tax treatment of spread betting and indirect equity investments? Perhaps it has been done in other threads on this subject?

I think so it as affects your profits. Is there any downside to this approach? If not why don't more people do it?
 

room305

Registered User
Messages
477
I think so it as affects your profits. Is there any downside to this approach? If not why don't more people do it?

The major downside of your strategy as far as I can see is the margin requirements. If a fund loses 5% and then subsequently gains 10%, you're up 4.5%. However, with spreadbetting in the same scenario, it is possible that the loss exceeded your margin cover and you will have missed out on the subsequent rally.

If you provide a bigger margin cover to prevent this, then that money is simply sitting in your spreadbetting account earning no interest (losing value in real terms).
 
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gonk

Guest
The major downside of your strategy as far as I can see is the margin requirements. If a fund loses 5% and then subsequently gains 10%, you're up 4.5%. However, with spreadbetting in the same scenario, it is possible that the loss exceeded your margin cover and you will have missed out on the subsequent rally.

If you provide a bigger margin cover to prevent this, then that money is simply sitting in your spreadbetting account earning no interest (losing value in real terms).

This is an important point - you need to set your stop level far enough below the current price so you won't get stopped out by the normal fluctuations in price, but close enough so that you don't lose a packet if there's a market crash.

In the OP's example, he's talking about a stop level 250 points below market, or 5.6%. To increase that to 10% - 445 points below market - would incur a deposit of €1,335. You wouldn't lose a huge amount of interest on that in a year. But you end up with the same exposure to the market and the same potential gain as if all the money was put into a tracker fund. (And of course, if you put all the money in the fund, you're also foregoing the interest it could have earned on deposit).The gain, if it arises, is tax-free. The balance of the money in the deposit account is capital secure and earning interest.

In my view this is a perfectly viable and prudent use of spreadbetting. To answer the OP's question as to why more people don't do it, I don't know, except possibly a prejudice that spreadbetting is for gamblers and day-traders only.
 
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OnlyOne

Guest
I looked at a similar scenario when trying to create my own index tracker for the FTSE. If it's at 6000 and I bet 3euro/pt, I've gained exposure of 18000euro. As I'm a conservative investor, I then place 9000euro on deposit with the spread-betting company to cover most collapses in share prices (up to 50%). Great - I appear to have gained 2:1 leverage for very little cost (i.e. mainly the lost interest on my 9000euro deposit + low annual spread commission) of maybe 2% of 18000.

The problem is, as with any borrowing, there is a hidden cost with the leverage which is factored into the spread-bet quote. Typically the leverage works out at LIBOR+2% at minimum which can be intuitively seen by considering that the FTSE spread-bet quote will be above the actual current FTSE level. This converges towards the actual level over the period of the bet. This is expensive - so the apparent free lunch is not so free and, personally coupled with the fact that your bet is constantly marked-to-market, I have come to the conclusion that long-term index tracking is not best achieved using spread-betting.
 

glendale

Registered User
Messages
47
The problem is, as with any borrowing, there is a hidden cost with the leverage which is factored into the spread-bet quote. Typically the leverage works out at LIBOR+2% at minimum which can be intuitively seen by considering that the FTSE spread-bet quote will be above the actual current FTSE level. This converges towards the actual level over the period of the bet. This is expensive - so the apparent free lunch is not so free and, personally coupled with the fact that your bet is constantly marked-to-market, I have come to the conclusion that long-term index tracking is not best achieved using spread-betting.

Does this mean that if over a year the FTSE rises X% the FTSE price quoted by a spread betting company will rise < X%?

I didn't know what 'marked to market' mean, here is the Wikipedia entry :

http://http://en.wikipedia.org/wiki/Mark_to_market

What is the disadvantage of being marked to market on a spread bet?
 
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gonk

Guest
I looked at a similar scenario when trying to create my own index tracker for the FTSE. If it's at 6000 and I bet 3euro/pt, I've gained exposure of 18000euro. As I'm a conservative investor, I then place 9000euro on deposit with the spread-betting company to cover most collapses in share prices (up to 50%). Great - I appear to have gained 2:1 leverage for very little cost (i.e. mainly the lost interest on my 9000euro deposit + low annual spread commission) of maybe 2% of 18000.

The problem is, as with any borrowing, there is a hidden cost with the leverage which is factored into the spread-bet quote. Typically the leverage works out at LIBOR+2% at minimum which can be intuitively seen by considering that the FTSE spread-bet quote will be above the actual current FTSE level. This converges towards the actual level over the period of the bet. This is expensive - so the apparent free lunch is not so free and, personally coupled with the fact that your bet is constantly marked-to-market, I have come to the conclusion that long-term index tracking is not best achieved using spread-betting.

Depositing enough to cover a 50% market fall would in my view be excessive. From the peak of the dot com boom in late 1999 to the trough of the following crash in 2003 the FTSE fell by roughly that percentage. If you had stayed in for the ride, you still wouldn't have recovered your original position.

You don't take into account in your analysis the tax-free status of gains on spread-bets, which more than offsets the extra costs of spreads and interest (assuming there are gains!)

Another advantage of betting on indices with spread bets is you can take a Euro denominated position on a non-Euro index and avoid f/x risk. For example, you take a Euro bet on the nominal level of the Nikkei 225. In recent months as the yen has fallen, the Nikkei has risen, as the exchange rate fall is perceived as favourable to Japanese exporters. Someone in a fund would have lost on the f/x fall what they gained on the index rise. A Euro spreadbetter gains in Euros as the index rises.

Like the other poster, I don't understand the disadvantage of the position being mark-to-market, at least not for indices with readily and objectively determinable values.
 

glendale

Registered User
Messages
47
Another advantage of this approach is that it possible to still have an investment in the stock market while having a large mojoirty of your savings availble to purchanse a house. This would be of particular interst to perspective FTB who don't want to tie up all their savings in shares as they want easy access to their money if they find a suitable house yet would like a better return than a high interest account.

Could someone explain how similar this approach is to tracker bonds, in the above method the capital isn't quarenteed but is their anyother difference. What do tracker bonds have such a bad name?
 
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OnlyOne

Guest
When I use the phrase "mark-to-market", I'm referring to the fact that, as with margin purchases, your position is constantly being monitored for solvency. i.e. if the market falls 15% and your min margin requirement has been breached, your position will be closed. This can be contrasted with investing with borrowed money.

50% is probably excessive - it is an example to cover a position throughout a catasrophic event such as a terrorist attack. e.g. the DJIA fell 15% over the week after September 11. Perhaps 25-30% would be more realistic.

The CGT status of SB is an advantage as long as your betting periods are long since capital losses cannot be offset against gains. The Revenue aren't stupid and the reason it's not taxed is that, on average, the majority use short bet periods and lose. Another point here is that SB companies only offer short periods (often max 3months) to keep the profits rolling in. Claiming euro bets to be an advantage could be slightly misleading since effectively it's removed foreign currency exposure and thus reduced risk AND potential return which you have just attempted to increase via leverage. It's a bit like claiming that you should always hedge against the dollar when investing in US stocks. It all depends on your portfolio - wide diversification will include currency diversity.With SB, no choice is offered to the investor.

I'm aware of the quoted advantages pointed out - my posting was not an analysis of SB! It merely was meant to point out that leverage always has a cost. If the FTSE rises by X%, the bet will rise by <X% over the bet period. I didn't read that on the DI website.
 

room305

Registered User
Messages
477
If the FTSE rises by X%, the bet will rise by <X% over the bet period. I didn't read that on the DI website.

I wonder is a lot of the erroneous information contained in your post above directly related to your lack of understanding that many spreadbetting companies track index futures rather than the index itself.
 
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gonk

Guest
When I use the phrase "mark-to-market", I'm referring to the fact that, as with margin purchases, your position is constantly being monitored for solvency. i.e. if the market falls 15% and your min margin requirement has been breached, your position will be closed. This can be contrasted with investing with borrowed money.

OK, well if that's what you mean, personally I consider the above a benefit of spreadbetting.

Another point here is that SB companies only offer short periods (often max 3months) to keep the profits rolling in..

There are longer contracts available - e.g., IG Index does an annual contract on the FTSE 100.

Claiming euro bets to be an advantage could be slightly misleading since effectively it's removed foreign currency exposure . . . With SB, no choice is offered to the investor.

I don't agree that it's misleading at all. In the example I gave you can, if you wish, take a Yen-denominated bet on the Nikkei (or USD, GBP or AUD for that matter!)

I'm simply saying that removing the currency exposure reduces the number of variables in your bet and simplifies the risk assessment. The option to take a position on the currency remains open to you either by taking a foreign currency denominated bet on a market, or by a spreadbet directly on the f/x rate. Your final remark, therefore, on lack of choice is nonsense - in fact spreadbetting offers the maximum possible choice. (I should also have said that no similar flexibility is available to an investor in a fund tracking a non-Euro denominated index - one is automatically subject to currency fluctuations.)
 
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OnlyOne

Guest
Ouch! Apologies for my erroneous, nonsensical comments! I genuinely wish you both the best of luck with your spread-betting.
 
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