Do Leveraged ETFs Really Amplify Late-Day Returns and Volatility?
51 Pages Posted: 2 Oct 2014 Last revised: 25 Jul 2017
There are 2 versions of this paper
Do Leveraged ETFs Really Amplify Late-Day Returns and Volatility?
Are Concerns About Leveraged ETFs Overblown?
Date Written: July 10, 2017
Abstract
The design of leveraged and inverse exchange-traded funds (ETFs) has raised concerns that they may exacerbate volatility in financial markets by mechanically rebalancing their portfolios in the same direction as contemporaneous returns. We show theoretically, however, that capital flows can lower ETF rebalancing demand and completely eliminate it in the limit. Empirically, we find that capital flows substantially reduce ETF rebalancing demand, even during periods of severe market stress. After accounting for capital flows and standard risk factors, we find that the impact of ETF rebalancing on late-day returns and volatility is economically insignificant.
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