The Performance of Leveraged and Inverse Leveraged Exchange Traded Funds

Journal of Investment Management (JOIM), First Quarter 2014

Posted: 15 Nov 2014

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Gerald W. Buetow

James Madison University - Finance and Business Law Program

Date Written: 2014

Abstract

We document significant abnormal daily returns to leveraged and inverse leveraged exchange-traded funds (ETFs). Abnormal returns are positive for leveraged funds and negative to inverse leveraged funds, and the magnitude increases in the absolute value of the leverage multiple. We propose and test a model linking the abnormal return performance to transactions costs associated with the frequent (daily) rebalancing necessary to maintain target exposures as well as other costs including the swap financing costs and the cost to borrow in the lending market. In the full cross-section, the results suggest funding costs associated with achieving leverage impact returns negatively (positively) for leveraged (inverse leveraged) funds. Capitalizing on a key institutional feature, analysis of pairs of mirror funds reveals transactions costs associated with the maintenance of daily leverage multiples meaningfully impact fund returns. The results are also consistent with inverse leveraged funds bearing the cost-to-borrow to the benefit of the leveraged (long) funds.

Keywords: ETFs, leverage, transactions costs, rebalancing, performance benchmarking

JEL Classification: G00

Suggested Citation

Henderson, Brian Joseph and Buetow, Gerald W., The Performance of Leveraged and Inverse Leveraged Exchange Traded Funds (2014). Journal of Investment Management (JOIM), First Quarter 2014, Available at SSRN: https://ssrn.com/abstract=2440120

Brian Joseph Henderson (Contact Author)

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Gerald W. Buetow

James Madison University - Finance and Business Law Program ( email )

Zane Showker Hall
Harrisburg, VA 22801
United States
703-568-3077 (Phone)
703-568-3299 (Fax)

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