Leveraged ETF Pairs: An Empirical Evaluation of Portfolio Performance
30 Pages Posted: 3 Nov 2018 Last revised: 26 Jan 2020
Date Written: October 8, 2018
This paper examines the performance of investment strategies involving leveraged and inverse leveraged ETF pairs. As in Jiang and Peterburgsky’s (2017) simulation analysis, the empirical analysis in this paper indicates that simple portfolios of bull/bear short positions constructed to approximately mimic an underlying index (such as the S&P 500) outperform the index on a risk-adjusted basis. The outperformance asymptotically diminishes as the investor’s rebalance bounds tighten. Additionally, the results support the theoretical positive relationship between outperformance and index standard deviation and negative relationship between outperformance and index absolute return.
Keywords: Exchange Traded Funds, ETFs, Pairs Trading, Constant Leverage Trap, Portfolio Management
JEL Classification: G11
Suggested Citation: Suggested Citation