Monthly-rebalanced leveraged exchange-traded products: Performance and mandatory rebalancing needs

Abstract

This paper examines the performance of monthly-rebalanced Leveraged Exchange-Traded Products (LETPs), and compares the performance and mandatory rebalancing needs between monthly-rebalanced LETPs and daily-rebalanced LETPs. We find that our sample monthly-rebalanced LETPs can approximately deliver their stated multiples. The monthly-rebalanced LETPs still suffer from compounding effect when holding period is multiple months, but this effect is mitigated relative to daily-rebalanced LETPs. Investors can gain a predictable return multiple different from the stated multiple by purchasing monthly-rebalanced LETPs at a non-rebalancing time. Even after controlling for the underlying index, holding period, and target return multiple, the performance and risks of monthly-rebalanced LETPs are much different from those of daily-rebalanced LETPs. In addition, the monthly LETPs generally require more mandatory rebalancing than the daily ones. These findings can help investors, practitioners, and regulators better understand the performance behaviors and potential consequences of monthly-rebalanced LETPs.