Trading leveraged Exchange-Traded products is hazardous to your wealth

D’Hondt, Catherine, Richard McGowan and Patrick Roger
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D’Hondt, Catherine: Université catholique de Louvain, LIDAM/LFIN, Belgium

No 2021004, LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: Using a large set of both trading and survey data, we sketch the profile of the typical retail investor who trades Leveraged Exchange-Traded Products (LETPs). Our findings show that the typical user of LETPs looks like an overconfident gambler willing to take a high risk, though some highly loss averse investors use inverse leveraged Exchange-Traded Products (ILETPs) for hedging purposes. Aggregating holdings in both stocks and Exchange-Traded Products (ETPs), users of LETPs get a lower performance than retail investors who invest in vanilla ETPs (VETPs). The reason is twofold: they trade too much and hurt their returns when investing in LETPs. Though trading LETPs could be interpreted as rational gambling, the skewness of the monthly portfolio returns of LETP users does not offset the risk-return sacrifice in the mean-variance space.

Keywords: Leverage; ETPs; Retail investors; Gambling; Skewness (search for similar items in EconPapers)
JEL-codes: G11 G28 G40 (search for similar items in EconPapers)
Date: 2021-01-01
Note: In: The Quarterly Review of Economics and Finance, 2021, vol. 80, p. 287-302
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Citations: View citations in EconPapers (3)

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Journal Article: Trading leveraged Exchange-Traded products is hazardous to your wealth (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ajf:louvlr:2021004

DOI: 10.1016/j.qref.2021.02.012

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