The case explores the decision of a financial advisor in Hong Kong whether to recommend leveraged and inverse ETFs (L&I ETFs) to her clients. The case introduces unique features of L&I ETFs, methodologies of performance calculation, their relative merits and risks comparing with alternative products available in the market including derivative warrants (DWs), Callable Bull Bear Contracts (CBBCs), traditional ETFs, futures and options. Thinking from the perspectives of a financial advisor, students should combine the knowledge of L&I ETFs, the given market data, the market views of the financial advisor, as well as the clients’ characteristics (age, educational backgrounds, future investment goals, etc.) to come up with tailor-made recommendations for each individual client.
The key learning objectives of the case are:
- To understand the development of L&I ETFs as a financial innovation worldwide and in Hong Kong.
- To understand performance calculation, daily investment objective, daily rebalancing of L&I ETFs.
- To understand the structure of L&I ETFs and how they are different from derivative warrants (DWs), Callable Bull Bear Contracts (CBBCs), traditional ETFs, futures and options.
- To explore the market conditions and investment strategies involving L&I ETFs.
- To provide students with a basic understanding of a financial advisor’s roles and responsibilities.