Multi-day Return Properties of Leveraged Index ETFs

Abstract

This paper examines the multi-day return properties of leveraged ETFs (LETFs), which use daily rebalancing to maintain a constant leverage ratio. Critics claim LETFs deviate from and lose value over time relative to their non-reset portfolios—portfolios with the same initial leverage but no daily rebalancing. We challenge these assertions through theoretical analysis and simulations. We find that LETFs’ multi-day returns closely align with those of non-reset portfolios across most indices and holding periods (up to one year). While substantial deviations can occur under high volatility and long holding periods, they are positively skewed and generally favorable.

Keywords: leveraged ETFs; hedging

JEL Classification: G11, G12