The Lemon Fool

Traditional long-only investors are increasingly using spread betting like a normal stockbroking account.

https://www.standard.co.uk/business/mar ... 15955.html

This is a 4-year old article actually but had me thinking over the weekend that using a plodding underlying such as the CTY investment trust (IG offer a quarterly rolling market) would juice the returns for a growth investor over the long term. The secret lies in sizing the initial position with conservative gearing - eg. a £1000 cash deposit covering initial margin of £600 would give the CTY underlying room to fall ~15% before any margin call - and a willingness to drip feed/average down long position with additional funds through those periods.

Not my cup of tea actually - I prefer using Options rather than Futures markets - but thought it might interest some here.

M

The purpose of the advertorial (advert purporting to be an editorial piece) is to encourage spread betting and so increase the profits of the spread betting industry.

The industry needs naive people who believe that money can be made from the stock market in double-quick time. It is possible to make money from the stock market, but only using the get-rich-slow 'Intelligent Investor' technique advocated by Warren Buffett and his mentor - Benjamin Graham.

moorfield wrote:

Not my cup of tea actually

Nor mine - anyway the key is in the name : it's betting not investing.

BusyBumbleBee wrote:Nor mine - anyway the key is in the name : it's betting not investing.

That's an interesting debate in itself. Is buying a house, on a 95% LTV mortgage, betting or investing?

I use my IG spread bet account as a pseudo stock broking account. For the last 18 months I have been rolling positions in 2 iShares ETFs, CSP1 (S&P 500) and CS51 (EUROSTOXX 50). These are part of my strategic global equities portfolio and ideally would reside inside tax shelters. I will gradually migrate the positions into tax shelters as space becomes available. The annual cost of holding CSP1 in this way is just under 1% and the cost of holding CS51 about 1.1%. I do not fully fund my IG account, so the the holding cost is mitigated by interest on cash I hold on deposit. Initial margin of 10% is covered by some securities I hold in my IG stockbroking account (LLPC, BRK.B and VCTs). The advantage of doing this is of course the tax saving, as I am not liable for either income tax on the dividends or CGT on the capital gains.

In addition to the ETFs, I have a rolling position in FTSE 100 futures. I have been rolling these for over 5 years, but they only became strategic part of the equities portfolio about 18 months ago.

I also now do all my options trading in my IG account. I worked out that once the CGT, broker fees and margin costs I was paying on options trading was taken into account, there was very little to choose between spread betting options and using a conventional broker. At least, not for the way I trade now.

I don't think I would want to hold positions in ITs in a spread bet account though as the spreads would make this expensive. Rolling CTY forwards for example would cost about 2.8% per annum at IG. The spreads are much lower on the ETF forwards I roll and larger irrelevant on the FTSE futures.

A major drawback with using a spread bet account in this way is that you don't actually hold the underlying positions. So if the spread bet company went bust you would only be covered under FSCS for the first £50k. After that you would be an unsecured creditor and so could potentially lose everything above £50k. So well worth choosing your spread bet company wisely and try to minimise the amount of margin in the account! At leawst with IG the initial margin can be covered with securities from the stock broking account rather than cash.

hiriskpaul wrote: The annual cost of holding CSP1 in this way is just under 1% and the cost of holding CS51 about 1.1%.

Hi Paul, couple of questions. First, I'm curious as to why you use bets on the above ETF rather than directly on the S&P futures. Presumably you have calculated that the ETFs are cheaper? In doing the calculation, did you take account of dividend handling in arriving at the annual cost of 1%?

Second, and slightly OT, have you managed to figure out what the major changes are to IG's recently revised terms? Anything I should be wary of as a spreadbetting customer? I haven't gathered the courage yet to dive into the details!!


GS

GoSeigen wrote:I'm curious as to why you use bets on the above ETF rather than directly on the S&P futures. Presumably you have calculated that the ETFs are cheaper?

Not a direct answer to your question, but I have found that when trading options, it can be better to use options on a US-traded ETF rather than on the underlying index future, for two reasons:

1) American options can be exercised early. That can be a good thing if you're long the options, but bad if you're short them.

2) At expiry you can choose to receive or deliver the ETF, which may be beneficial over the futures, which are always cash-settled. You may be able to defer taxes, for instance.

LooseCannon101 wrote:It is possible to make money from the stock market, but only using the get-rich-slow 'Intelligent Investor' technique advocated by Warren Buffett and his mentor - Benjamin Graham.

Whilst I would agree that you're more likely to make money on that basis it's certainly not the only way to do so. I - and I suspect many other Fools - regularly make decent profits from trading shares, and I've been doing so for many years.

Of course I recognise that I've been lucky in that I've generally been trading in a rising market, but the same applies to LTBH investors. It's all too easy to flatter ourselves that we're investment genii when even poor decisions make profits.

GoSeigen wrote:

hiriskpaul wrote: The annual cost of holding CSP1 in this way is just under 1% and the cost of holding CS51 about 1.1%.

Hi Paul, couple of questions. First, I'm curious as to why you use bets on the above ETF rather than directly on the S&P futures. Presumably you have calculated that the ETFs are cheaper? In doing the calculation, did you take account of dividend handling in arriving at the annual cost of 1%?

Second, and slightly OT, have you managed to figure out what the major changes are to IG's recently revised terms? Anything I should be wary of as a spreadbetting customer? I haven't gathered the courage yet to dive into the details!!


GS

Futures are fine. I used to get exposure to the S&P 500 by going long the future and short the GBP/USD forward. The short on GBP/USD is required in order to gain the correct currency exposure as without it the futures position would behave like a GBP hedged tracker. e.g. 1% fall in GBP/USD, with no change in the S&P would be expected to deliver a 1% rise in an S&P 500 tracker priced in pounds, but the future would barely move. This is quite cheap to do, but when I spotted that IG offered CSP1, which is priced in GBP, with a low spread this was a simpler way to go. In some ways the future and FX forward route is better in that the underlying interest rates are set by the market rather than IG, however the prices IG make for the CSP1 forward cannot be too far out of line otherwise it would present an arbitrage opportunity (CSP1 can be shorted). The rate IG are currently using to make their forward prices is about 0.75%.

Sometimes you might actually want to hedge out currency risk. I am currently doing this with long bets I have on US corporate bond ETFs, LQDE and IHYU. These are priced in USD, but I have GBP bets with no FX forward bet to match the currency exposure.

I did look through the latest terms and could not see anything particularly onerous. There is a section on “Manifest Error” that I don't remember seeing before. This I think is to cover a situation where something goes wrong at IG and they publish a very silly price, way out of line with the market. In that situation they will unwind trades so that you cannot profit from them! So no point looking for large arbitrage opportunities.

Clitheroekid wrote:

LooseCannon101 wrote:It is possible to make money from the stock market, but only using the get-rich-slow 'Intelligent Investor' technique advocated by Warren Buffett and his mentor - Benjamin Graham.

Whilst I would agree that you're more likely to make money on that basis it's certainly not the only way to do so. I - and I suspect many other Fools - regularly make decent profits from trading shares, and I've been doing so for many years.

Of course I recognise that I've been lucky in that I've generally been trading in a rising market, but the same applies to LTBH investors. It's all too easy to flatter ourselves that we're investment genii when even poor decisions make profits.

Clithoekid - Have you compared your returns to those of a total return world equity index fund? Over the long term e.g. 20 years, the latter has delivered about 9% per annum. I would rather use a boring technique to increase my wealth than have the excitement of quick gains and losses by spread betting.

LooseCannon101 wrote:

Clitheroekid wrote:

LooseCannon101 wrote:It is possible to make money from the stock market, but only using the get-rich-slow 'Intelligent Investor' technique advocated by Warren Buffett and his mentor - Benjamin Graham.

Whilst I would agree that you're more likely to make money on that basis it's certainly not the only way to do so. I - and I suspect many other Fools - regularly make decent profits from trading shares, and I've been doing so for many years.

Of course I recognise that I've been lucky in that I've generally been trading in a rising market, but the same applies to LTBH investors. It's all too easy to flatter ourselves that we're investment genii when even poor decisions make profits.

Clithoekid - Have you compared your returns to those of a total return world equity index fund? Over the long term e.g. 20 years, the latter has delivered about 9% per annum. I would rather use a boring technique to increase my wealth than have the excitement of quick gains and losses by spread betting.

There is no more reason to use a spread bet account for quick gains and losses than there is to buy and sell shares for quick gains and losses. I have had a rolling spread bet on FTSE futures for over 6 years and I ran a geared bet on a corporate bond ETF for more than 3 years. My option trades can last anything from a week to 6 months, but that would be the same as if I did the trades with a regular broker.

Admittedly spread betting companies like to see a lot of churn and provide charting and TA tools to encourage it, but so do many regular brokers.

hiriskpaul wrote:Futures are fine. I used to get exposure to the S&P 500 by going long the future and short the GBP/USD forward. The short on GBP/USD is required in order to gain the correct currency exposure as without it the futures position would behave like a GBP hedged tracker. e.g. 1% fall in GBP/USD, with no change in the S&P would be expected to deliver a 1% rise in an S&P 500 tracker priced in pounds, but the future would barely move. This is quite cheap to do, but when I spotted that IG offered CSP1, which is priced in GBP, with a low spread this was a simpler way to go. In some ways the future and FX forward route is better in that the underlying interest rates are set by the market rather than IG, however the prices IG make for the CSP1 forward cannot be too far out of line otherwise it would present an arbitrage opportunity (CSP1 can be shorted). The rate IG are currently using to make their forward prices is about 0.75%.

Thanks, Paul. I had overlooked the difference in currency exposure, so that makes sense now. I mostly use IGIndex for hedging and exotic strategies (e.g. options trading, short bonds). Don't generally pay too much attnetion to the currency aspects!


GS

moorfield wrote:That's an interesting debate in itself. Is buying a house, on a 95% LTV mortgage, betting or investing?

It's betting, but political expedience says your bet is underwritten by governments of both colours.

Regarding the currency exposure aspect I think that the spreadbet serves a useful purpose in that you can invest in overseas markets without having to take currency risk. By way of example I used to hold Japanese stock market funds and noticed that my return always seemed to be pretty flat, when the Nikkei rose the Yen fell and vice versa. Using a spreadbet on the Nikkei allows a UK based investor to reap the rewards of a rising Japanese stock market without being subject to the exchange rate affecting the return.

1nv35t wrote:Ayondo cater for 1:1 i.e. no margin positions (fully funded), so no carry/overnight costs. They also cater for opening £ or $ accounts so you can FX hedge or not as desired. £50K of 'insurance' is further backed up by their own insurance policy against any funds you have on deposit with them up to a further £1M amount.

Ayondo is interesting. I tried them out for a while with a £1 per point bet on the FTSE 100, with no gearing. They subsequently tracked the index perfectly, paying out dividends every Thursday which matched the dividend adjustment amount of the FTSE100 Actuaries index. I have since moved more of my FTSE 100 position to Ayondo. I keep below £50k though as I am not too confident about the extra insurance.

Ayondo would be a good option for an investment in CTY, as mentioned in the OP, if someone wanted to buy and hold CTY without gearing but they had insufficient space in an ISA for it. Current spread is 428.73/431.78, compared with 429.70/430.80. So the Ayondo spread is wider, but there is no stamp duty to pay on it.

hiriskpaul wrote:Ayondo would be a good option for an investment in CTY, as mentioned in the OP, if someone wanted to buy and hold CTY without gearing but they had insufficient space in an ISA for it.

... and also for tax-avoiding a Corbyn/McDonnell government! (as I've commented elsewhere)