IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1610.09404.html
   My bibliography  Save this paper

Understanding the Tracking Errors of Commodity Leveraged ETFs

Author

Listed:
  • Kevin Guo
  • Tim Leung

Abstract

Commodity exchange-traded funds (ETFs) are a significant part of the rapidly growing ETF market. They have become popular in recent years as they provide investors access to a great variety of commodities, ranging from precious metals to building materials, and from oil and gas to agricultural products. In this article, we analyze the tracking performance of commodity leveraged ETFs and discuss the associated trading strategies. It is known that leveraged ETF returns typically deviate from their tracking target over longer holding horizons due to the so-called volatility decay. This motivates us to construct a benchmark process that accounts for the volatility decay, and use it to examine the tracking performance of commodity leveraged ETFs. From empirical data, we find that many commodity leveraged ETFs underperform significantly against the benchmark, and we quantify such a discrepancy via the novel idea of \emph{realized effective fee}. Finally, we consider a number of trading strategies and examine their performance by backtesting with historical price data.

Suggested Citation

  • Kevin Guo & Tim Leung, 2016. "Understanding the Tracking Errors of Commodity Leveraged ETFs," Papers 1610.09404, arXiv.org.
    • Handle: RePEc:arx:papers:1610.09404
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1610.09404
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. K. Triantafyllopoulos & G. Montana, 2011. "Dynamic modeling of mean-reverting spreads for statistical arbitrage," Computational Management Science, Springer, vol. 8(1), pages 23-49, April.
    2. Tim Leung & Xin Li, 2015. "Optimal Mean Reversion Trading With Transaction Costs And Stop-Loss Exit," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-31.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jamie Kang & Tim Leung, 2017. "Asynchronous ADRs: overnight vs intraday returns and trading strategies," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 34(4), pages 580-596, October.
    2. 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.
    3. Tim Leung & Brian Ward, 2020. "Tracking VIX with VIX Futures: Portfolio Construction and Performance," World Scientific Book Chapters, in: John B Guerard & William T Ziemba (ed.), HANDBOOK OF APPLIED INVESTMENT RESEARCH, chapter 21, pages 557-596, World Scientific Publishing Co. Pte. Ltd..
    4. Tim Leung & Brian Ward, 2018. "Dynamic Index Tracking and Risk Exposure Control Using Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(2), pages 180-212, March.
    5. Guo, Kevin & Leung, Tim, 2017. "Understanding the non-convergence of agricultural futures via stochastic storage costs and timing options," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 32-49.
    6. Tim Leung & Brian Ward, 2015. "The golden target: analyzing the tracking performance of leveraged gold ETFs," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(3), pages 278-297, August.
    7. Paolo Guasoni & Eberhard Mayerhofer, 2015. "The Limits of Leverage," Papers 1506.02802, arXiv.org, revised Oct 2017.
    8. Tim Leung & Matthew Lorig & Andrea Pascucci, 2014. "Leveraged {ETF} implied volatilities from {ETF} dynamics," Papers 1404.6792, arXiv.org, revised Apr 2015.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tim Leung & Brian Ward, 2015. "The golden target: analyzing the tracking performance of leveraged gold ETFs," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(3), pages 278-297, August.
    2. Boming Ning & Kiseop Lee, 2024. "Advanced Statistical Arbitrage with Reinforcement Learning," Papers 2403.12180, arXiv.org.
    3. Boming Ning & Prakash Chakraborty & Kiseop Lee, 2023. "Optimal Entry and Exit with Signature in Statistical Arbitrage," Papers 2309.16008, arXiv.org, revised Mar 2024.
    4. Yerkin Kitapbayev & Tim Leung, 2018. "Mean Reversion Trading With Sequential Deadlines And Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-22, February.
    5. Kevin Guo & Tim Leung & Brian Ward, 2019. "How to mine gold without digging," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-30, March.
    6. Guo, Kevin & Leung, Tim, 2017. "Understanding the non-convergence of agricultural futures via stochastic storage costs and timing options," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 32-49.
    7. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078, December.
    8. Liangchen Li & Michael Ludkovski, 2018. "Stochastic Switching Games," Papers 1807.03893, arXiv.org.
    9. David S. Sun & Shih-Chuan Tsai & Wei Wang, 2013. "Behavioral Investment Strategy Matters: A Statistical Arbitrage Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S3), pages 47-61, July.
    10. Tim Leung & Zheng Wang, 2019. "Optimal risk-averse timing of an asset sale: trending versus mean-reverting price dynamics," Annals of Finance, Springer, vol. 15(1), pages 1-28, March.
    11. Liao Wang & David D. Yao, 2021. "Risk Hedging for Production Planning," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1825-1837, June.
    12. Minh Man Ngo & Huyen Pham, 2014. "Optimal switching for pairs trading rule: a viscosity solutions approach," Papers 1412.7649, arXiv.org.
    13. Jiao Li, 2016. "Trading VIX Futures under Mean Reversion with Regime Switching," Papers 1605.07945, arXiv.org, revised Jun 2016.
    14. de Angelis, Tiziano & Ferrari, Giorgio & Moriarty, John, 2016. "Nash equilibria of threshold type for two-player nonzero-sum games of stopping," Center for Mathematical Economics Working Papers 563, Center for Mathematical Economics, Bielefeld University.
    15. Baurdoux, Erik J. & Chen, Nan & Surya, Budhi & Yamazak, Kazutoshi, 2015. "Optimal double stopping of a Brownian bridge," LSE Research Online Documents on Economics 61618, London School of Economics and Political Science, LSE Library.
    16. Jiao Li, 2016. "Trading VIX futures under mean reversion with regime switching," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-20, September.
    17. Thomas Nanfeng Li & Agnès Tourin, 2016. "Optimal pairs trading with time-varying volatility," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1-29, September.
    18. Erik J. Baurdoux & Nan Chen & Budhi A. Surya & Kazutoshi Yamazaki, 2014. "Optimal double stopping of a Brownian bridge," Papers 1409.2226, arXiv.org, revised Dec 2014.
    19. Alex S. L. Tse & Harry Zheng, 2023. "Speculative trading, prospect theory and transaction costs," Finance and Stochastics, Springer, vol. 27(1), pages 49-96, January.
    20. Haipeng Xing, 2019. "A singular stochastic control approach for optimal pairs trading with proportional transaction costs," Papers 1911.10450, arXiv.org.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1610.09404. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.