Levered and Inverse ETPs: Blessing or Curse?

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, particularly those whose
benchmarks are futures-based indexes. 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. Levered and inverse products are not, and cannot be, effective
investment management tools.

Keywords: Levered and inverse funds, geared investments, front-running, futures indexes, contango July 17, 2020 *Corresponding

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