Levered and Inverse ETPs: Blessing or Curse?

31 Pages Posted: 6 May 2020

See all articles by Colby Pessina

Colby Pessina

Vanderbilt University - Owen Graduate School of Management

Robert E. Whaley

Vanderbilt University - Finance

Date Written: April 10, 2020

Abstract

Levered and inverse ETPs are designed to provide geared long and short exposures to the daily returns of different benchmark indexes. The benchmarks can be any reference index. The popular ones are on stocks, bonds, commodities and volatility. The problem with these products is that they are not generally well-understood. They are neither suitable buy-and-hold investments nor effective hedging tools. They are unstable and exist only as a mechanism for placing short-term directional bets. But, if that is their sole purpose, how is society better served? Traditionally, securities markets have existed as a means of capital formation and price discovery. The objective of this paper is to explain the mechanics of levered and inverse ETP returns, simulate their expected return performance based on the most popular benchmarks, and document the actual performance of 35 popular products. Ultimately, the decision about whether to trade these products rests with the investor. But, at a more basic level, why do the products exist?

Keywords: Levered and inverse ETPs, volatility, front-running, geared investments

JEL Classification: G10, G11, G12, G13, G18

Suggested Citation

Pessina, Colby and Whaley, Robert E., Levered and Inverse ETPs: Blessing or Curse? (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3572981 or http://dx.doi.org/10.2139/ssrn.3572981

Colby Pessina

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Robert E. Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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