November 13, 2013 - Volatility Effects
An array of leveraged exchange-traded funds (ETF) track short-term (daily) changes in popular indexes. Over longer holding periods, these ETFs tend to veer off track. The cumulative veer can be large. How do leveraged ETFs actually perform over a multi-year period? What factors contribute to their failure to achieve targeted leverage versus underlying indexes? To investigate, we consider:
- 46 ProShares 2X and -2X leveraged equity index ETFs (23 matched long-short pairs), with start date 4/23/07 (determined by the youngest of these funds), encompassing broad indexes, style indexes and sector indexes.
- 10 ProShares 3X and -3X leveraged equity index ETFs (five matched long-short pairs), with start date 2/11/10, encompassing broad indexes only.
We measure achieved average daily leverage by comparing the average daily return of each leveraged ETF to the average daily return of a 1X ETF designed to track the same index. We measure achieved long-term leverage by comparing the terminal return of each leveraged ETF to the terminal return of a 1X ETF designed to track the same index. Using daily adjusted prices for all these funds through 10/31/13, we find that: Keep Reading