Long Term Performance of Leveraged ETFs

31 Pages Posted: 20 Feb 2009 Last revised: 2 Aug 2009

See all articles by Lei Lu

Lei Lu

Asper School of Business, University of Manitoba

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Ge Zhang

Long Island University

Date Written: August 1, 2009

Abstract

In this paper, we study leveraged ETFs, in particular, Ultra ETFs and UltraShort ETFs from the ProShares family. These Ultra (UltraShort) ETFs are designed to provide twice (twice the opposite) of the performance of the benchmark on a daily basis. We focus on the relation between long term performance of leveraged ETFs and benchmarks. Our results show that over holding periods no greater than one month, an investor can safely assume that the Ultra (UltraShort) ETF would provide twice the return (twice the negative return) of the underlying benchmark. Over the holding period of one quarter, the UltraShort ETFs can deviate from twice the negative returns of the benchmark. For Ultra ETFs, this deviation occurs when the holding period is one year. Finally, we show that the long term performance of the leveraged ETFs is negatively impacted by the quadratic variation and the auto-variation during the period, with auto-variation being the more dominant factor.

Suggested Citation

Lu, Lei and Wang, Jun and Zhang, Ge, Long Term Performance of Leveraged ETFs (August 1, 2009). Available at SSRN: https://ssrn.com/abstract=1344133 or http://dx.doi.org/10.2139/ssrn.1344133

Lei Lu

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Jun Wang (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Ge Zhang

Long Island University ( email )

720 Northern Boulevard
Brookville, 11548-1327
United States

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