Multi-year Performance of Leveraged ETFs
Posted in Volatility Effects
June 23, 2015
There are many leveraged exchange-traded funds (ETF) designed to track multiples of short-term (daily) changes in popular indexes. Over longer holding periods, these ETFs tend to veer off track. The cumulative tracking error can be large. How well do leveraged ETFs track benchmarks over a multi-year period? What return metric drives the degree to which they fail to achieve targeted leverage? To investigate, we consider two sets of the oldest leveraged ETFs:
- 34 ProShares +2X and -2X leveraged equity index ETFs (17 matched long-short pairs), with start date 3/14/07 (limited by the youngest fund), which track U.S. broad market and sector indexes.
- 10 ProShares +3X and -3X leveraged equity index ETFs (five matched long-short pairs), with start date 2/11/10, which track U.S. broad stock market indexes only.
We measure actual average daily tracking by comparing the average daily return of each leveraged ETF to the average daily return of a +1X ETF that tracks the same index. We measure longer-term (monthly) tracking by comparing the monthly Sharpe ratio of each leveraged ETF to that of a +1X ETF that tracks the same index. Using daily and monthly adjusted closing prices for the above funds and +1X counterparts through May 2015 and the contemporaneous monthly U.S. Treasury bill yield as the risk-free rate for Sharpe ratio calculations, we find that: (more…)