Research / Research Papers

Leveraged ETFs, Holding Periods and Investment Shortfalls

Published in the Journal of Index Investing, Winter 2010, Vol. 1, No. 3: pp. 45-57.

2010-08-09

Leveraged and Inverse Leveraged ETFs replicate the leveraged or the inverse of the daily returns of an index. Several papers have established that investors who hold these investments for periods longer than a day expose themselves to substantial risk as the holding period returns will deviate from the returns to a leveraged or inverse investment in the index. It is possible for an investor in a leveraged ETF to experience negative returns even when the underlying index has positive returns. This paper estimates the distributions of holding periods for investors in leveraged and inverse ETFs.

The SLCG study shows that a substantial percentage of investors may hold these short-term investments for periods longer than one or two days, even longer than a quarter. The study estimates the investment shortfall incurred by investors who hold leveraged and inverse compared to investing in a simple margin account to generate the same leveraged or short investment strategy.

The study finds that investors in leveraged and inverse ETFs can lose 3% of their investment in less than 3 weeks, an annualized cost of 50%.

By Ilan Guedj, Guohua Li, and Craig McCann

Download Research Paper  
 
Craig J. McCann
Principal703.246.9381