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Trading leveraged Exchange-Traded products is hazardous to your wealth

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  • D’Hondt, Catherine

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • McGowan, Richard
  • Roger, Patrick

Abstract

Using a large set of both trading and survey data, we sketch the profile of the typical retail investor who trades Leveraged Exchange-Traded Products (LETPs). Our findings show that the typical user of LETPs looks like an overconfident gambler willing to take a high risk, though some highly loss averse investors use inverse leveraged Exchange-Traded Products (ILETPs) for hedging purposes. Aggregating holdings in both stocks and Exchange-Traded Products (ETPs), users of LETPs get a lower performance than retail investors who invest in vanilla ETPs (VETPs). The reason is twofold: they trade too much and hurt their returns when investing in LETPs. Though trading LETPs could be interpreted as rational gambling, the skewness of the monthly portfolio returns of LETP users does not offset the risk-return sacrifice in the mean-variance space.

Suggested Citation

  • D’Hondt, Catherine & McGowan, Richard & Roger, Patrick, 2021. "Trading leveraged Exchange-Traded products is hazardous to your wealth," LIDAM Reprints LFIN 2021004, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2021004
    DOI: https://doi.org/10.1016/j.qref.2021.02.012
    Note: In: The Quarterly Review of Economics and Finance, 2021, vol. 80, p. 287-302
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    Cited by:

    1. D’Hondt, Catherine & Elhichou Elmaya, Younes & Petitjean, Mikael, 2021. "Blaming or praising passive ETFs?," LIDAM Discussion Papers LFIN 2021008, Université catholique de Louvain, Louvain Finance (LFIN).
    2. 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.
    3. D’Hondt, Catherine & Merli, Maxime & Roger, Tristan, 2022. "What drives retail portfolio exposure to ESG factors?," Finance Research Letters, Elsevier, vol. 46(PB).

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    More about this item

    Keywords

    Leverage ; ETPs ; Retail investors ; Gambling ; Skewness;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G40 - Financial Economics - - Behavioral Finance - - - General

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