Tracking Errors and Long-Run Performance of Leveraged ETFs
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Authors
Wu, Congsheng
Issue Date
2016-04-01
Type
Presentation
Language
en_US
Keywords
Exchange-traded funds (ETFs) , Leveraged exchange-traded funds (ETFs)
Alternative Title
Abstract
Leveraged exchange-traded funds (ETFs) are relatively new to the world of investments but have become increasingly popular to aggressive investors. While a regular ETF tracks the value of a specific index of stocks, a leveraged ETF attempts to achieve a multiple of the return of the underlying index on a daily basis. This multiple can be positive in the case of bull ETFs or negative in the case of bear (or inverse) ETFs. To accomplish these objectives, leveraged and inverse funds pursue a range of investment strategies through the use of swaps, futures contracts, options and other derivative instruments. Due to the effect of compounding, operating expenses and daily resets, not to mention tracking errors, the performance of leveraged funds over longer periods of time can differ substantially from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. Such performance deviations are often quite meaningful and unexpected over the long run. This paper provides an empirical assessment of how well the leveraged ETFs track their underlying index. The results show that the tracking errors on average are small. However, substantial tracking errors do occur from time to time. Despite the price decay associated with leveraged ETFs, their long-run performance.