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The pricing and performance of leveraged exchange-traded funds

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  • Charupat, Narat
  • Miu, Peter

Abstract

Leveraged ETFs are a recent and very successful financial innovation. They provide daily returns that are in a multiple or a negative multiple of the daily returns on a market benchmark. In this paper, we examine the characteristics, trading statistics, pricing efficiency and tracking errors of a sample of leveraged ETFs. We find that these ETFs are traded mainly by retail traders with very short holding periods. Price deviations (from NAV) are small on average, but large premiums and discounts are prone to occur. More interestingly, the behavior of premiums is different between bull (i.e., those with a positive multiple) and bear ETFs (i.e., those with a negative multiple). Our findings are consistent with the argument that the end-of-day rebalancing of the funds' exposures increases market volatility at the close of a trading day. As for tracking errors, they are small for holding periods of up to a week, but become increasingly larger for longer horizons.

Suggested Citation

  • Charupat, Narat & Miu, Peter, 2011. "The pricing and performance of leveraged exchange-traded funds," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 966-977, April.
    • Handle: RePEc:eee:jbfina:v:35:y:2011:i:4:p:966-977
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    Cited by:

    1. Farouk, Faizal & Masih, Mansur, 2016. "Are there profit (returns) in Shariah-compliant exchange traded funds? The multiscale propensity," Research in International Business and Finance, Elsevier, vol. 38(C), pages 360-375.
    2. Devmali Perera & Jędrzej Białkowski & Martin T. Bohl, 2022. "Is the Tracking Error Time-Varying? Evidence from Agricultural ETCs," Working Papers in Economics 22/13, University of Canterbury, Department of Economics and Finance.
    3. Maya Malinda & Jo-Hui Chen, 2022. "The forecasting of consumer exchange-traded funds (ETFs) via grey relational analysis (GRA) and artificial neural network (ANN)," Empirical Economics, Springer, vol. 62(2), pages 779-823, February.
    4. Mathew Mallika & M. M. Sulphey, 2018. "Gold Exchange Traded Fund - Price Discovery and Performance Analysis," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 65(4), pages 477-495, December.
    5. Loviscek, Anthony & Tang, Hongfei & Xu, Xiaoqing Eleanor, 2014. "Do leveraged exchange-traded products deliver their stated multiples?," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 29-47.
    6. Peltomäki, Jarkko, 2017. "Beta as a determinant of investor activity in sector exchange-traded funds," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 137-145.
    7. Jung-Chu Lin, 2020. "How do Inverse Exchange-Traded Funds Targeting Taiwan Shares Track their Underlying Indices?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(6), pages 714-726, June.
    8. Hongfei Tang & Xiaoqing Eleanor Xu, 2019. "Dissecting the tracking performance of regular and leveraged VIX ETPs," Review of Derivatives Research, Springer, vol. 22(2), pages 261-327, July.
    9. Staer, Arsenio & Sottile, Pedro, 2018. "Equivalent volume and comovement," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 143-157.
    10. Li, Mingsheng & Zhao, Xin, 2014. "Impact of leveraged ETF trading on the market quality of component stocks," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 90-108.
    11. Perera, Devmali & Białkowski, Jędrzej & Bohl, Martin T., 2022. "Is the tracking error time-varying? Evidence from agricultural ETCs," Research in International Business and Finance, Elsevier, vol. 63(C).
    12. John, Alexander & DeVault, Luke, 2023. "Implicit leverage: Can accrued fees cause levered ETN returns?," Finance Research Letters, Elsevier, vol. 55(PB).
    13. 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).
    14. Gregor Dorfleitner & Anna Gerl & Johannes Gerer, 2018. "The pricing efficiency of exchange-traded commodities," Review of Managerial Science, Springer, vol. 12(1), pages 255-284, January.
    15. Ivanov, Ivan T. & Lenkey, Stephen L., 2018. "Do leveraged ETFs really amplify late-day returns and volatility?," Journal of Financial Markets, Elsevier, vol. 41(C), pages 36-56.
    16. Denis Davydov & Jarkko Peltomäki, 2023. "Investor attention and the use of leverage," The Financial Review, Eastern Finance Association, vol. 58(2), pages 287-313, May.
    17. Hongkai Cao & Rupak Chatterjee & Zhenyu Cui, 2019. "Options valuation and calibration for leveraged exchange-traded funds with Heston–Nandi and inverse Gaussian GARCH models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-37, September.
    18. Ramesh Adhikari & Humnath Panta & M. Kabir Hassan, 2020. "Performance of ProShares Triple-Leveraged Equity ETFs," Capital Markets Review, Malaysian Finance Association, vol. 28(2), pages 1-18.
    19. Gerasimos Rompotis, 2016. "Return and volatility of emerging markets leveraged ETFs," Journal of Asset Management, Palgrave Macmillan, vol. 17(3), pages 165-194, May.
    20. Lee, Kyuseok & Kim, Soo-Hyun, 2018. "Do Leveraged/Inverse Etfs Wag The Underlying Market? : Evidence From The Korean Stock Market," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 59(2), pages 83-94, December.
    21. Box, Travis & Davis, Ryan & Evans, Richard & Lynch, Andrew, 2021. "Intraday arbitrage between ETFs and their underlying portfolios," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1078-1095.
    22. Bansal, Vipul K. & Marshall, John F., 2015. "A tracking error approach to leveraged ETFs: Are they really that bad?," Global Finance Journal, Elsevier, vol. 26(C), pages 47-63.
    23. Narat Charupat & Peter Miu, 2013. "The Pricing Efficiency Of Leveraged Exchange-Traded Funds: Evidence From The U.S. Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(2), pages 253-278, June.
    24. Miu, Peter & Yueh, Meng-Lan & Han, Jing, 2021. "Performance of Japanese leveraged ETFs," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    25. Zhongjin Lu & Zhongling Qin, 2021. "Leveraged Funds and the Shadow Cost of Leverage Constraints," Journal of Finance, American Finance Association, vol. 76(3), pages 1295-1338, June.

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