Marc Gerstein

Leveraged ETFs: Making Volatility More Volatile?

I think it's way too early to be doing studies like these.

Leveraged ETFs came out in late '06 and really got going in '07 and '08. Can't we think of other things that might have caused increased market volatility, such as issues surrounding an epoch credit crisis and challenge to the viability of our financial system, not to mention the recession that went along with it.

Even as to the chart above, wouldn't the bank stress test details be sufficient to cause increase market angst whether or not leverage ETFs existed?

The study that was referenced above was done by Barclays, which seems to have a sizable axe to grind in the ETF world, and which is not in the leveraged segment of the market. Might that have motivated them to start crunching numbers years before we can accumulate enough data to get viable samples?

Just a few thoughts.

Testing a Leveraged ETF Strategy

Yes, optionsgirl, lack of tax efficiency is an issue.

I take your point re: Rydex, but I opted to use ProShares because those are more popular in the marketplace, meaning better volume and less of the pricing oddities we see due to the diminished functioning of the in-kind exchange mechanism. I am watching Rydex (and Direxion, to get a feel for the triple leverage, which is a lot!). If I do a Rydex test, I'll need a much larger slippage assumption.

By the way, your post reminded me of something I should have pointed out and will do so now.

All price data used in the testing is adjusted for dividends, stock splits, and distributions. So this result does reflect an assumption that one who received any of these mega-end-year distributions would have reinvested them back into shares of the ETF.