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Unintended Characteristics of Leveraged and Inverse ETFs

Steve LeCompte | | Posted in: Volatility Effects

The intended characteristics of leveraged and inverse exchange-traded funds (ETF) are obvious. Do they have unintended characteristics that may make them unsuitable for some investors? In their April 2009 paper entitled "The Dynamics of Leveraged and Inverse-Exchange Traded Funds", Minder Cheng and Ananth Madhavan investigate the dynamics, market impacts, unusual features and investor suitability of leveraged (2x and 3x long exposure) and inverse (-1x, -2x and -3x short exposure) ETFs. Using daily returns for many leveraged and inverse ETFs, they conclude that:

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