Investment Analysis of Leveraged ETFs

Abstract

Due to the lower management costs and higher liquidity versus traditional mutual funds, the ETFs category has recently expanded at a faster pace than anytime before. The transparency in publicly traded ETFs gives investors access to diversified portfolios that were only available to large institutions before. In this paper, we study the ETFs’ features, benefits and disadvantages from the asset management perspective with an emphasis on the structure and risk analysis of the leveraged ETFs. Our research indicates that ETFs, though attractive in many aspects, should be managed with caution. The leveraged and inverse ETFs can result in huge negative returns due to value decay effects and high bid-ask trading spreads.