Leveraged exchange-traded funds: admissible leverage and risk horizon

Leung, Tim; Santoli, Marco

doi:10.21314/jois.2012.013

Cited by 16 publications

(4 citation statements)

References 2 publications

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“…This should motivate future research on the horizon risk for LETF strategies. To this end, Leung and Santoli [7] study the admissible holding horizon and leverage ratio given a risk constraint. The recent papers [6,13,14] examine the dynamics of price spreads between ETF pairs, for example, gold vs. silver.…”

Section: Discussionmentioning

confidence: 99%

“…Taking advantage of the volatility decay, a well-known trading strategy used by practitioners involves shorting a ±β pair of LETFs with the same reference, as discussed in [2,7,9,11]. Since the LETFs have opposite daily returns on the same reference index, the portfolio has very little exposure to the reference as long as the holding period is sufficiently short.…”

Section: A Static Letf Portfoliomentioning

confidence: 99%

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Understanding the Tracking Errors of Commodity Leveraged ETFs

Guo

Leung

2015

Commodities, Energy and Environmental Finance

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Commodity exchange-traded funds (ETFs) are a significant part of the rapidly growing ETF market. They have become popular in recent years as they provide investors access to a great variety of commodities, ranging from precious metals to building materials, and from oil and gas to agricultural products. In this article, we analyze the tracking performance of commodity leveraged ETFs and discuss the associated trading strategies. It is known that leveraged ETF returns typically deviate from their tracking target over longer holding horizons due to the so-called volatility decay. This motivates us to construct a benchmark process that accounts for the volatility decay, and use it to examine the tracking performance of commodity leveraged ETFs. From empirical data, we find that many commodity leveraged ETFs underperform significantly against the benchmark, and we quantify such a discrepancy via the novel idea of realized effective fee. Finally, we consider a number of trading strategies and examine their performance by backtesting with historical price data.

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Section: Discussionmentioning

confidence: 99%

Section: A Static Letf Portfoliomentioning

confidence: 99%

Understanding the Tracking Errors of Commodity Leveraged ETFs

Guo

Leung

2015

Commodities, Energy and Environmental Finance

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“…With respect to the impact of investors' horizon on the return of leveraged ETFs, Leung and Santoli (2012) report that performance generally declines as the duration of holding period increases. Therefore, investors having long-term horizon should probably avoid embarking on leveraged ETFs.…”

Section: Investors In Leveraged Etfsmentioning

confidence: 99%

On leveraged and inverse leveraged exchange traded funds

Rompotis¹

2014

AESTIMATIO

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The leveraged and inverse ETFs are the subject of the current paper. At first, a comprehensive review of the literature on leveraged ETFs is provided. Then, the features, trading mechanism, and the advantages and disadvantages of leveraged ETFs are analyzed along with the similarities to and differences from the classic ETFs while tax considerations surrounding leveraged ETFs are highlighted too. Finally, the role of market volatility and its impact on the return of leveraged ETFs is accentuated.

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“…In fact, SEC issued in 2009 an alert announcement regarding the riskiness of LETFs, especially when holding them long-term. 1 Leung and Santoli (2012) derived the admissible holding horizons for LETFs with respect to different risk measures. This motivates us to analyze the long-term growth rate of expected utility of holding an LETF, and examine the dependence on the leverage ratio and dynamics of the reference.…”

Section: Introductionmentioning

confidence: 99%

LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH

Leung

Park

2017

Int. J. Theor. Appl. Finan.

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This paper studies the long-term growth rate of expected utility from holding a leveraged exchanged-traded fund (LETF), which is a constant proportion portfolio of the reference asset. Working with the power utility function, we develop an analytical approach that employs martingale extraction and involves finding the eigenpair associated with the infinitesimal generator of a Markovian time-homogeneous diffusion. We derive explicitly the long-term growth rates under a number of models for the reference asset, including the geometric Brownian motion model, GARCH model, inverse GARCH model, extended CIR model, 3/2 model, quadratic model, as well as the Heston and 3/2 stochastic volatility models. We also investigate the impact of stochastic interest rate such as the Vasicek model and the inverse GARCH short rate model. We determine the optimal leverage ratio for the long-term investor and examine the effects of model parameters.

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Leveraged exchange-traded funds: admissible leverage and risk horizon

Cited by 16 publications

References 2 publications

Understanding the Tracking Errors of Commodity Leveraged ETFs

Understanding the Tracking Errors of Commodity Leveraged ETFs

On leveraged and inverse leveraged exchange traded funds

LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH

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