Monthly Rebalanced Shorting of Leveraged ETF Pairs

Is shorting pairs of leveraged exchange-traded funds (ETF) reliably profitable? In their December 2017 paper entitled “Shorting Leveraged ETF Pairs”, Christopher Hessel, Jouahn Nam, Jun Wang, Xing Cunyu and Ge Zhang examine monthly returns from shorting a pair of leveraged and inverse leveraged ETFs for the same index. They first investigate what circumstances make this strategy profitable. They then test the strategy on each of the triple/inverse triple (3X/-3X) pairs associated with the following six base ETFs: Financial Select Sector SPDR (XLF: FAS/FAZ), Powershares QQQ (QQQ: TQQQ/SQQQ), iShares Russell 2000 Index (IWM: TNA/TZA), SPDR S&P 500 (SPY: UPRO/SPXU), VanEck Vectors Junior Gold Miners ETF (GDXJ: JNUG/JDST) and Energy Select Sector SPDR (XLE: ERX/ERY). Their analysis assumes rebalancing pair short positions to equal value at the end of each month and holding them to the end of the next month. Using monthly data for the selected leveraged ETFs from the end of 2007 (except the end of November 2009 for the leveraged versions of GDXJ) through the end of December 2016, they find that: (more…)