Leveraged ETFs Decay Dashboard

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Includes: BDCL, BDCS, DGLD, DIA, DRN, DRV, DSLV, DUST, EDC, EDZ, EEM, ERX, ERY, GDX, GLD, IWM, LABD, LABU, NUGT, QQQ, SDOW, SDY, SDYL, SLV, SPXU, SPY, SQQQ, TLT, TMF, TMV, TNA, TQQQ, TZA, UDOW, UGLD, UPRO, USLV, VNQ, XBI, XLE
by: Fred Piard

Summary

The sources of decay (reminder).

1-month and 1-year decays of major leveraged ETFs.

The worst decays of the month.

I measure once a month the decay of major leveraged ETFs. It may be useful for anyone using leveraged ETFs for investing, trading or hedging.

What is the decay?

Most of the time, a leveraged ETF does worse than the underlying asset leveraged by the same factor. This relative decay has several reasons: beta-slippage, roll yield, tracking errors, management fees. Roll yield may be prominent for commodity ETFs, but beta-slippage is usually the main reason of decay. However, it doesn't always result in decay. When an asset is trending with little volatility, a leveraged ETF can bring an excess return over the leveraged asset. You can click here to read an explanation of beta-slippage with examples.

Monthly and Yearly Drifts on 2/13/2017

Definitions are needed. "Lev" is the leveraging factor. "Return" is the total return of an ETF (including dividends). "IndexReturn" is the total return of the underlying index, measured on a non-leveraged ETF (also with dividends). "ETFdrift" is the drift of the ETF relative to the leveraged index. "TradeDrift" is the drift relative to an equivalent position in the non-leveraged index. ETFdrift and TradeDrift are calculated as followed, where Abs is the absolute value operator.

ETFdrift = Return - (IndexReturn x Lev)

TradeDrift = ETFdrift / Abs(Lev)

"Decay" is negative drift. "Month" stands for 21 trading days, "year" for 252 trading days.

A drift is a difference between 2 returns, so it can be below -100%.

Index

Lev.

Ticker

1-month Return

1-month ETFdrift

1-month TradeDrift

1-year Return

1-year ETFdrift

1-year TradeDrift

S&P 500

1

SPY

1.94%

0.00%

0.00%

29.32%

0.00%

0.00%

3

UPRO

5.70%

-0.12%

-0.04%

103.65%

15.69%

5.23%

-3

SPXU

-5.60%

0.22%

0.07%

-56.75%

31.21%

10.40%

ICE US20+yr Tbond

1

TLT

-0.93%

0.00%

0.00%

-7.50%

0.00%

0.00%

3

TMF

-3.19%

-0.40%

-0.13%

-26.00%

-3.50%

-1.17%

-3

TMV

1.84%

-0.95%

-0.32%

12.73%

-9.77%

-3.26%

NASDAQ 100

1

QQQ

3.62%

0.00%

0.00%

33.40%

0.00%

0.00%

3

TQQQ

10.98%

0.12%

0.04%

120.27%

20.07%

6.69%

-3

SQQQ

-10.33%

0.53%

0.18%

-61.98%

38.22%

12.74%

DJ 30

1

DIA

1.81%

0.00%

0.00%

32.61%

0.00%

0.00%

3

UDOW

5.24%

-0.19%

-0.06%

120.80%

22.97%

7.66%

-3

SDOW

-5.33%

0.10%

0.03%

-59.86%

37.97%

12.66%

Russell 2000

1

IWM

1.18%

0.00%

0.00%

47.77%

0.00%

0.00%

3

TNA

2.77%

-0.77%

-0.26%

190.26%

46.95%

15.65%

-3

TZA

-4.59%

-1.05%

-0.35%

-74.43%

68.88%

22.96%

S&P Select Energy

1

XLE

-2.18%

0.00%

0.00%

39.50%

0.00%

0.00%

3

ERX

-7.05%

-0.51%

-0.17%

132.14%

13.64%

4.55%

-3

ERY

5.79%

-0.75%

-0.25%

-72.03%

46.47%

15.49%

MSCI US REIT

1

VNQ

1.82%

0.00%

0.00%

23.00%

0.00%

0.00%

3

DRN

4.95%

-0.51%

-0.17%

66.89%

-2.11%

-0.70%

-3

DRV

-5.86%

-0.40%

-0.13%

-53.90%

15.10%

5.03%

ARCA Gold Miners

1

GDX

12.05%

0.00%

0.00%

38.07%

0.00%

0.00%

3

NUGT

36.81%

0.66%

0.22%

23.15%

-91.06%

-30.35%

-3

DUST

-31.76%

4.39%

1.46%

-90.79%

23.42%

7.81%

MSCI Emerging

1

EEM

4.57%

0.00%

0.00%

35.19%

0.00%

0.00%

3

EDC

13.69%

-0.02%

-0.01%

113.66%

8.09%

2.70%

-3

EDZ

-13.00%

0.71%

0.24%

-68.48%

37.09%

12.36%

Gold spot

1

GLD

3.61%

0.00%

0.00%

-1.23%

0.00%

0.00%

3

UGLD

10.52%

-0.31%

-0.10%

-13.28%

-9.59%

-3.20%

-3

DGLD

-10.16%

0.67%

0.22%

-7.70%

-11.39%

-3.80%

Silver spot

1

SLV

7.25%

0.00%

0.00%

13.85%

0.00%

0.00%

3

USLV

21.92%

0.17%

0.06%

14.18%

-27.37%

-9.12%

-3

DSLV

-19.77%

1.98%

0.66%

-51.46%

-9.91%

-3.30%

Wells Fargo BDC

1

BDCS

2.16%

0.00%

0.00%

46.06%

0.00%

0.00%

2

BDCL

3.79%

-0.53%

-0.27%

116.36%

24.24%

12.12%

S&P Div. Aristocrats

1

SDY

1.28%

0.00%

0.00%

26.94%

0.00%

0.00%

2

SDYL

2.81%

0.25%

0.13%

57.38%

3.50%

1.75%

S&P Biotech Select

1

XBI

5.13%

0.00%

0.00%

46.37%

0.00%

0.00%

3

LABU

15.28%

-0.11%

-0.04%

110.08%

-29.03%

-9.68%

-3

LABD

-16.84%

-1.45%

-0.48%

-86.64%

52.47%

17.49%

BDCL, SDYL are Exchange-Traded Notes. ETNs entail additional counterparty risks.

In 1 month:

  • The 3 worst decays of the month are for inverse leveraged ETFs in Russell 2000, Biotechnology and long-term Treasury bonds (TZA, LABD, TMV), due to daily return volatility. The drifts relative to a similar exposure in the underlying assets were between -0.3% and -0.5%.
  • The highest positive drift was in shorting gold miners (NYSEARCA:DUST), in a loss over 30%. The drift relative to a similar exposure in the underlying index was about +1.5%.

In 1 year:

  • In the yearly data, the worst decays are in NUGT (long miners), LABU (long biotechnology) and USLV (long silver). Continued whipsaw in underlying asset prices have resulted in a high beta-slippage.
  • The highest positive drift is in Russell 2000, both long and short (TNA,TZA) and short Biotechnology (NYSEARCA:LABD). Due to a steady bullish trend in stocks with little volatility, long and short leveraged ETFs based on the S&P 500, Dow Jones, Nasdaq 100 and MSCI emerging markets index have also a significant positive drift.
  • It means that hedging a stock portfolio taking a long position in an inverse leveraged stock index ETF may have been a good deal for one year (depending on rebalancing dates). It can be implemented in an IRA account (without short selling or margin). Note of caution: it is not true in all market conditions. When volatility comes back, stock index leverage ETFs will suffer a negative drift. I have been using SDS and SPXU to hedge a part of my portfolio on this period.

Note of caution: the leveraged ETF decay looks like an invitation to short sellers. Selling short leveraged ETFs has unpredictable risks and costs listed here.

If you like this, click "follow" at the top to be notified of my dashboard monthly updates.

Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long SPXU, SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long SPXU for hedging a stock portfolio, not a bearish bet. Long SPY in an ETF strategy based on my market risk indicator MTS10.

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