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

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  • Narat Charupat
  • Peter Miu

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.

Suggested Citation

  • Narat Charupat & Peter Miu, 2014. "A New Method to Measure the Performance of Leveraged Exchange-Traded Funds," The Financial Review, Eastern Finance Association, vol. 49(4), pages 735-763, November.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:4:p:735-763
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    File URL: http://hdl.handle.net/10.1111/fire.12055
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    Citations

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    Cited by:

    1. Tim Leung & Brian Ward, 2015. "The golden target: analyzing the tracking performance of leveraged gold ETFs," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(3), pages 278-297, August.
    2. Yuan, Ying & Huang, Yizhao & Chen, Haoran, 2021. "Monthly-rebalanced leveraged exchange-traded products: Performance and mandatory rebalancing needs," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    3. Denis Davydov & Jarkko Peltomäki, 2023. "Investor attention and the use of leverage," The Financial Review, Eastern Finance Association, vol. 58(2), pages 287-313, May.
    4. Ramesh Adhikari & Humnath Panta & M. Kabir Hassan, 2020. "Performance of ProShares Triple-Leveraged Equity ETFs," Capital Markets Review, Malaysian Finance Association, vol. 28(2), pages 1-18.
    5. Miu, Peter & Yueh, Meng-Lan & Han, Jing, 2021. "Performance of Japanese leveraged ETFs," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).

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