Understanding the risk of leveraged ETFs
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.
Year of publication: |
2010
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Authors: | Jarrow, Robert A. |
Published in: |
Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 7.2010, 3, p. 135-139
|
Publisher: |
Elsevier |
Keywords: | Leveraged ETFs Inverse ETFs Dynamic portfolio construction |
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