Understanding the risk of leveraged ETFs

Robert Jarrow ()

Finance Research Letters, 2010, vol. 7, issue 3, 135-139

Abstract: The purpose of this paper is to clarify the risks of leveraged ETFs. We do this by showing how to construct a k-times leveraged ETF as a dynamic portfolio in the ETF and a money market account. This construction characterizes the return distribution of the leveraged ETF over any investment horizon. As a corollary, we show that a k-times leveraged ETF will not earn k times the return of the ETF. It differs due to a term involving the ETF's volatility and the interest paid on the borrowing over the investment horizon.

Keywords: Leveraged; ETFs; Inverse; ETFs; Dynamic; portfolio; construction (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:7:y:2010:i:3:p:135-139

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