Inefficiency of Leveraged/Inverse ETFs
Michael C. I. Nwogugu
affiliation not provided to SSRN
February 20, 2012
While synthetic funds, synthetics ETF and Leveraged/Inverse ETFs have grown in popularity during then last ten years, there are many structural problems inherent in the legal/economic structure of these ETFs and funds. These problems raise actionable issues of “Suitability” and “fraud” under US securities laws, because the advertised terms of most Leveraged/Inverse ETFs and some Synthetic ETFs are mis-leading, and these ETFs have substantial tracking errors. This article contributes to the existing literature by: a) critiquing the structure of synthetics funds/ETFs and Leveraged/Inverse ETFs, b) explaining the biases and effects inherent in Leveraged/Inverse ETFs such as the tracking errors and the downward drift in returns of Leveraged/Inverse ETFs, c) showing how Put Call Parity Theorem affects the accuracy of these funds/ETFs; d) analyzing “Suitability” issues.
Number of Pages in PDF File: 22
Keywords: portfolio management, risk management, Indices; Put-Call Parity, ICAPM, complexityworking papers series
Date posted: June 13, 2010 ; Last revised: June 11, 2012
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