A New Method to Measure the Performance of Leveraged Exchange‐Traded Funds

29 Pages Posted: 20 Oct 2014

See all articles by Narat Charupat

Narat Charupat

McMaster University - DeGroote School of Business

Peter Miu

McMaster University - DeGroote School of Business

Date Written: November 2014

Abstract

We examine the effects of daily return compounding, financing costs, and management factors on the performance of leveraged exchange‐traded funds (LETFs) over various holding periods. We propose a new method to measure LETFs’ tracking errors that allows us to disentangle these effects. Our results show that the compounding effect generally has more influence on tracking errors than other factors, especially for long holding periods and in a “sideways” market. The explicit costs (i.e., the expense ratios) and other factors (e.g., financing costs) can materially affect the performance of LETFs, especially for those with high leverage ratios and bear funds.

Keywords: exchange‐traded funds, leverage, tracking errors, regression analysis, bull funds, bear funds

JEL Classification: G10, G12, G23

Suggested Citation

Charupat, Narat and Miu, Peter, A New Method to Measure the Performance of Leveraged Exchange‐Traded Funds (November 2014). Financial Review, Vol. 49, Issue 4, pp. 735-763, 2014, Available at SSRN: https://ssrn.com/abstract=2511988 or http://dx.doi.org/10.1111/fire.12055

Narat Charupat (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Peter Miu

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext 23981 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
711
PlumX Metrics