Levered and Inverse ETPs: Blessing or Curse?
31 Pages Posted: 6 May 2020
Date Written: April 10, 2020
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: Suggested Citation