Performance of ProShares Triple-Leveraged Equity ETFs

Research Question: How well do triple leveraged exchange-traded funds (ETFs) issued by ProShares perform and track their underlying indices? Motivation: Prior research on the relative performance and tracking ability of leveraged and inverse ETFs (LETFs) is not conclusive. We re-examine and extend the findings of prior research (Charupat and Miu, 2011; Loviscek et al., 2014). We have a unique set of LETFs more recent and historical price data over a longer sample period, and a unifying methodological framework. Our findings help many investors understand the implications of including LETFs in their portfolios for up to six months. Idea: We examine how well LETFs achieve their objectives using mean deviations and tracking errors of cumulative and holding period returns over various non-overlapping holding periods. Our holding period ranges from one day to six months. We also study how much LETFs deviate from their benchmark indices during high volatile markets. Data: We use daily prices of LETFs and values of their underlying indices from the inception date of each LETF to May 29, 2020. We have data for 2,749 trading days. We retrieve all data from Money.net. Method/Tools: We use three sets of statistical tools to examine the return deviations. They include univariate tests, pooled regression-based alphas, betas, and tracking errors and bootstrapping. Findings: Although tracking errors increase with the number of holding periods, LETFs do well up to six months, and the magnitude of deviations are different for bull and bear ETFs. But, LETFs fail to deliver promised returns during high volatile markets. Our findings complement some prior research and contrast with others and bring some new insights on the performance of LETFs. Contributions: We provide new evidence that LETFs provide premiums or discounts beyond one month up to six months, but they fail to track their indices during high volatile markets.