Leveraging Chinese Stock Markets: Tracking the Performance and Return Deviation of U.S.-listed Chinese LETFs

Abstract

This paper presents a comprehensive examination of the tracking performance and return deviation of U.S.-traded Chinese Leveraged Exchange-traded Funds (LETFs). Our results suggest that investors should be mindful of the fact that these Chinese LETFs actually track U.S.-based benchmarks rather than their Chinese index benchmarks, and consequently suffer from tracking errors due to “benchmark substitution” and nonsynchronous trading between the U.S. and Chinese markets. As for the Chinese LETFs’ ability to track their target return, market inefficiency accounts for the majority of daily return deviations, but this effect does not accumulate over time due to the creation/redemption feature; the net asset value (NAV) deviation is small on a daily basis, but accumulates over time. Over multiple trading days, there is a sizable, cumulative, and generally negative compounding return deviation owing to the daily rebalancing nature of these funds and high volatility in the benchmark return during the sample period.