Blessing or Curse? Institutional Investment in Leveraged ETFs

45 Pages Posted: 7 May 2021

See all articles by Luke DeVault

Luke DeVault

Clemson University - Department of Finance

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Kainan Wang

University of Toledo

Date Written: May 1, 2021

Abstract

We document the increasing role leveraged exchange traded funds (ETFs) play in institutional portfolios over time. A subset of independent investment advisors, quasi-indexers, and transient portfolio managers all make substantive use of these tools. Leveraged ETFs can be used for diversification or to implement strategic bets. Empirical tests suggest that institutional holders of leveraged ETFs predict weak portfolio performance in aggregate, consistent with manager hubris, especially among the set of institutional managers most likely to lack management skill. Interestingly, managers appear to reduce positions in leveraged ETFs following good past performance, potentially to lock in good returns, consistent with compensation-based incentives.

Keywords: Institutional investor, leveraged ETF, portfolio performance, timing

Suggested Citation

DeVault, Luke and Turtle, Harry J. and Wang, Kainan, Blessing or Curse? Institutional Investment in Leveraged ETFs (May 1, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3839061

Luke DeVault

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Kainan Wang (Contact Author)

University of Toledo ( email )

Department of Finance
Mail Stop 103
Toledo, OH 43606
United States

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