Leveraged ETF Pairs: An Empirical Evaluation of Portfolio Performance

Abstract

We examine the performance of investment strategies involving leveraged and inverse leveraged ETF pairs. As in Jiang and Peterburgsky’s (2017) simulation analysis, the empirical analysis in this article indicates that simple portfolios of bull/bear short positions constructed to approximately mimic an underlying index (such as the S&P 500) outperform the index on a risk-adjusted basis. The outperformance asymptotically diminishes as the investor’s rebalance bounds tighten. Additionally, results indicate that the volatility effect dominates the trend effect for bull leveraged ETFs. This finding is relevant for the debate on the regulation of leveraged ETF markets.

TOPICS: Exchange-traded funds and applications, simulations, performance measurement, legal/regulatory/public policy

Key Findings

• ▪ Simple portfolios of bull/bear short positions in leveraged and inverse leveraged ETFs constructed to approximately mimic an underlying index (such as the S&P 500) outperform the index on a risk-adjusted basis.

• ▪ The outperformance asymptotically diminishes as the investor’s rebalance bounds tighten.

• ▪ The volatility effect dominates the trend effect for bull leveraged ETFs.