A Survey on Leveraged and Inverse Exchange-Traded Funds

Abstract

Leveraged and inverse ETFs, which promise to deliver two or three times the return of a specified benchmark (in a positive or a negative fashion) on a daily basis, have become a fast-growing innovation in the ETF industry. In this article, a sample of 40 inverse and 28 leveraged ETFs belonging to Proshares family is examined to see how frequently these ETF types deliver their stated multiple, finding that they basically fail to meet their daily target. We then search whether there is any significant day-of-the-week effect on the effort of Proshares to achieve their investment goal. The results indicate that the discrepancy between the actual return and the predefined multiple is smaller on Wednesday. In the last step, we compare Proshares to regular ETFs tracking the same indexes, at first taking into account the daily volume, trading frequency, and expense ratios. The results demonstrate that the leveraged ETF market is less liquid than the regular ETF market (less volume and trading frequency) while the leveraged and inverse ETFs are more expensive than their regular counterparts. Secondly, we compare return and risk of Proshares and regular ETFs, taking into consideration the return and risk of the indexes as well. The findings show that, on average, the inverse ETFs underperform their regular ETF competitors and the corresponding indexes while they are more risky than them. On the other hand, the results of the study provide weak evidence that the leveraged ETFs, on average, outperform the regular ETFs and the indexes but they are more hazardous.