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## Leveraged ETFs

Leveraged ETFs seek to return some multiple of an index. For example, ticker SSO targets a return which is 2 times (2X) the return on the S&P 500.

• So the leveraged ETF is similar to buying an index on margin.

• There are also inverse leveraged ETFs. These seek to return some negative multiple of an index.

## Leveraged ETF Quotes

On the next slide you can see a quote for an ETF and a leveraged ETF on the same index.

• The quote shows the daily percent return. Note that the leveraged ETF does a fairly good job of returning a multiple of the index over a single day.

• The ETF is the top quote, and the 2X leveraged ETF is below.

## When Do Leveraged ETFs Not Work?

Leveraged ETFs do a good job of returning a multiple of an index’s return over a single day.

• However, over any time period longer than a day, returns from the leveraged ETF will depart from being a simple multiple of the index.

• Also, the longer you hold the Leveraged ETF, the more its returns will diverge from being a multiple of the underlying index.

## Why is the Error Greater Over Longer Holding Periods?

Say both an ETF on an index and a leveraged ETF are trading for $100. The index declines by 2% today, so the ETF declines to$98 and the leveraged ETF declines to $96. Now say tomorrow the index increases by 3%, so the ETF increases to$100.94 and the leveraged ETF increases to \$99.64.

• The ETF has a two-day return of 0.94%, and the leveraged ETF returned -0.36%.

• This is caused by the nature of returns and is not a fault in the way leveraged ETFs are managed.

## Interactive App

You can use the app on the following slide to see the divergence in the return of an ETF and leveraged ETF on an index.

• The ETF returns are multiplied by 2, because each leveraged ETF is a 2X.

• Change the length of time to see how this affects the divergence.

## List of Selected ETFs, Leveraged ETFs, and their Indices

• S&P 500: SPY and SSO (2X)
• Russell 2000: IWM and UWM (2X)
• Russell 1000: IWM and TNA (3X)
• NASDAQ 100: QQQ and QLD (2X)
• Dow Jones Industrial Average: DIA and DDM (2X)
• Barclay’s 7-10 yr. Treasury: IEF and UST (2X)
• Silver (the metal): SLV and ACQ (2X)
• U.S. Energy Sector: XLE and ERX (3X)

## Credits and Collaboration

Click the following links to see the codeline-by-line contributions to this presentation, and all the collaborators who have contributed to 5-Minute Finance via GitHub.