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Can international LETFs deliver their promised exposure to foreign markets?

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  • Tang, Hongfei
  • Xu, Xiaoqing Eleanor
  • Yang, Zihui

Abstract

This study examines the tracking performance of U.S.-traded International Leveraged Exchanged-traded Funds (ILETFs) that track the following markets: Brazil, China, Europe, Japan, and Mexico. We find that the beta and returns of these ILETFs can deviate dramatically from their naïve expected counterparts. We further develop a comprehensive framework that decomposes an ILETF's return deviation into misperception-related components and tracking error-related components. Our results suggest that daily investors in ILETFs should be mindful of their underexposure to the foreign markets and overexposure to the U.S. market, while longer-term investors should pay special attention to the negative compounding deviation during volatile markets.

Suggested Citation

  • Tang, Hongfei & Xu, Xiaoqing Eleanor & Yang, Zihui, 2014. "Can international LETFs deliver their promised exposure to foreign markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 30-74.
    • Handle: RePEc:eee:intfin:v:31:y:2014:i:c:p:30-74
    DOI: 10.1016/j.intfin.2014.03.003
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    Cited by:

    1. Yuan, Ying & Huang, Yizhao & Chen, Haoran, 2021. "Monthly-rebalanced leveraged exchange-traded products: Performance and mandatory rebalancing needs," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Leveraged ETFs; International stock markets; Price discovery; Compounding effect; Tracking error;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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