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Long-term returns estimation of leveraged indexes and ETFs

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Listed:
  • Hayden Brown

    (University of Nevada, Reno)

Abstract

Daily leveraged exchange traded funds amplify gains and losses of their underlying benchmark indexes on a daily basis. The result of going long in a daily leveraged ETF for more than one day is less clear. Here, bounds are given for the log-returns of a daily leveraged ETF when going long for more than just one day. The bounds are quadratic in the daily log-returns of the underlying benchmark index, and they are used to find sufficient conditions for outperformance and underperformance of a daily leveraged ETF in relation to its underlying benchmark index. Of note, results show promise for a 2x daily leveraged S&P 500 ETF. If the average annual log-return of the S&P 500 index continues to be at least .0658, as it has been in the past, and the standard deviation of daily S&P 500 log-returns is under .0125, then a 2x daily leveraged S&P 500 ETF will perform at least as well as the S&P 500 index in the long-run.

Suggested Citation

  • Hayden Brown, 2024. "Long-term returns estimation of leveraged indexes and ETFs," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 38(2), pages 165-190, June.
    • Handle: RePEc:kap:fmktpm:v:38:y:2024:i:2:d:10.1007_s11408-023-00440-3
    DOI: 10.1007/s11408-023-00440-3
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    References listed on IDEAS

    as
    1. Guido Giese, 2010. "On the risk-return profile of leveraged and inverse ETFs," Journal of Asset Management, Palgrave Macmillan, vol. 11(4), pages 219-228, October.
    2. Jarrow, Robert A., 2010. "Understanding the risk of leveraged ETFs," Finance Research Letters, Elsevier, vol. 7(3), pages 135-139, September.
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    4. repec:eme:mfppss:v:39:y:2013:i:5:p:476-508 is not listed on IDEAS
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    More about this item

    Keywords

    Leveraged ETFs; Leveraged exchange traded funds; Inverse leveraged ETFs; Returns estimation;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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