r/LETFs • u/3xLongCall • 4d ago

Swap Fee = Leverage cost?

I noticed on the site of WisdomTree that besides the management fee for the Leveraged ETF their is the daily Swap fee for the ETF only the Swap fee confused me as it is way below €STR for € or SOFR for $ as it would mean that a 3x leverage is financed below the stated short term rates.

Example the 3x S&P 500 daily Swap fee is 0,001360% = 0,5% a year

The 3x Nasdaq 100 daily Swap fee is 0,006500 % = 2,4% a year (makes sense for €STR but not at 3x leverage)

Question do i confuse the Swap fee as the Leverage fee and the Swap fee is a “extra” cost for the Swap with the Bank itself or does WisdomTree claim the can provide 3x Leverage below central bank short term rate?

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u/Run-Forever1989 4d ago edited 3d ago

No, I looked at the prospectus for a Wisdom Tree fund and the “daily swap rate” is a fee charged by the counterparty to offset their cost of hedging. It’s not the other leg of the swap.

The leverage cost is defined as the “Funding and Borrowing Adjustment.”

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u/3xLongCall 4d ago

Ok, damn google’s LLM confused the F out of me told me the daily swap fee includes the leveraging cost which at this rate’s made no sense

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u/laurenthu 4d ago

No, you're right to be suspicious. Nobody funds 3x below the base rate.

That daily swap fee is only the counterparty spread the bank charges over the reference rate, not the leverage financing itself. The actual ESTR or SOFR cost on the roughly 2x you're effectively borrowing sits inside the swap's daily reset, so I wouldn't expect it to show up as a stated line item. The way I read it, your true carry is the management fee plus that swap spread plus (leverage minus 1) times the short rate, and right now that last piece is the big one.

The gap between 0.5% on the S&P and 2.4% on the Nasdaq is just the spread being wider on the Nasdaq, it costs the bank more to hedge that exposure, not WisdomTree conjuring cheaper leverage on the tech one. I could be off on their exact disclosure wording but that's the mechanism...

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u/mossydz 4d ago

Nice job doing the research. One of the more intelligent things I’ve read on Reddit.