Understanding the risk of leveraged ETFs
AbstractThe purpose of this paper is to clarify the risks of leveraged ETFs. We do this by showing how to construct a k-times leveraged ETF as a dynamic portfolio in the ETF and a money market account. This construction characterizes the return distribution of the leveraged ETF over any investment horizon. As a corollary, we show that a k-times leveraged ETF will not earn k times the return of the ETF. It differs due to a term involving the ETF's volatility and the interest paid on the borrowing over the investment horizon.
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Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 7 (2010)
Issue (Month): 3 (September)
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Web page: http://www.elsevier.com/locate/frl
Leveraged ETFs Inverse ETFs Dynamic portfolio construction;
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