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Update on Shorting Leveraged ETF Pairs

| | Posted in: Short Selling, Volatility Effects

"Monthly Rebalanced Shorting of Leveraged ETF Pairs" finds that shorting some pairs of leveraged ETFs may be attractive. How has the strategy worked recently and how sensitive are findings to execution costs? To investigate, we consider three pairs of monthly reset equal short positions in:

  1. ProShares Ultra S&P500 (SSO) and ProShares UltraShort S&P500 (SDS)
  2. ProShares UltraPro S&P500 (UPRO) and ProShares UltraPro Short S&P500 (SPXU)
  3. ProShares UltraPro QQQ (TQQQ) and ProShares UltraPro Short QQQ (SQQQ)

We take initially, and at the end of each month renew, a -$100,000 short position in each pair member. This strategy generates an initial $200,000 cash in the portfolio and subsequently adds to or subtracts from this cash monthly based on short position performance. We initially assume return on cash covers any costs (transaction fees, bid/ask spread and interest on borrowed positions), but then test sensitivity to net carrying cost. Using monthly adjusted closes for these ETFs from respective inceptions through January 2020, we find that:

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