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Understanding the risk of leveraged ETFs


  • Jarrow, Robert A.


The 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.

Suggested Citation

  • Jarrow, Robert A., 2010. "Understanding the risk of leveraged ETFs," Finance Research Letters, Elsevier, vol. 7(3), pages 135-139, September.
  • Handle: RePEc:eee:finlet:v:7:y:2010:i:3:p:135-139

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    References listed on IDEAS

    1. R. Alton Gilbert & Adam M. Zaretsky, 2003. "Banking antitrust: are the assumptions still valid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 29-52.
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    Cited by:

    1. Tugkan Tuzun, 2013. "Are leveraged and inverse ETFs the new portfolio insurers?," Finance and Economics Discussion Series 2013-48, Board of Governors of the Federal Reserve System (U.S.).
    2. Charupat, Narat & Miu, Peter, 2011. "The pricing and performance of leveraged exchange-traded funds," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 966-977, April.
    3. Li, Mingsheng & Zhao, Xin, 2014. "Impact of leveraged ETF trading on the market quality of component stocks," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 90-108.
    4. Andrea Frazzini & Lasse H. Pedersen, 2012. "Embedded Leverage," NBER Working Papers 18558, National Bureau of Economic Research, Inc.
    5. Tim Leung & Qingshuo Song & Jie Yang, 2013. "Outperformance portfolio optimization via the equivalence of pure and randomized hypothesis testing," Finance and Stochastics, Springer, vol. 17(4), pages 839-870, October.
    6. Jason Scott & John Watson, 2013. "The Floor-Leverage Rule for Retirement," Discussion Papers 13-013, Stanford Institute for Economic Policy Research.
    7. Narat Charupat & Peter Miu, 2013. "The Pricing Efficiency Of Leveraged Exchange-Traded Funds: Evidence From The U.S. Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(2), pages 253-278, June.
    8. Bell, Peter N, 2010. "Beta estimates for leveraged ETF," MPRA Paper 26950, University Library of Munich, Germany.


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