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Solving the Return Deviation Conundrum of Leveraged Exchange-Traded Funds

Published online by Cambridge University Press:  03 January 2013

Hongfei Tang  and
Xiaoqing Eleanor Xu
Hongfei Tang
Affiliation:
[email protected]
Xiaoqing Eleanor Xu
Affiliation:
[email protected], Stillman School of Business, Seton Hall University, 400 S Orange Ave, South Orange, NJ 07079.
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Abstract

The large deviation of the actual return of a leveraged exchange-traded fund (LETF) from the leveraged multiple of the underlying index return has drawn considerable attention from investors, regulators, and the financial media. Despite this attention, the sources and fundamental determinants of the LETF return deviation remain unidentified. This study constructs a clear, unified, objective, and executable framework that addresses the behaviors, sources, and determinants of the LETF compounding and noncompounding deviations. Our theoretical predictions and empirical results hold the promise of guiding investors, regulators, financial advisors, and portfolio managers toward a thorough understanding of the return behavior of LETFs.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 1 , February 2013 , pp. 309 - 342
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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