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-OLD, 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. Only the latter is predictable. Roll yield may be prominent for commodity ETFs (leveraged or not), 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 6/16/2017 (closing prices)

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

3.39%

0.00%

0.00%

19.43%

0.00%

0.00%

3

UPRO

9.95%

-0.22%

-0.07%

61.26%

2.97%

0.99%

-3

SPXU

-9.36%

0.81%

0.27%

-43.55%

14.74%

4.91%

ICE US20+yr Tbond

1

TLT

2.71%

0.00%

0.00%

-5.14%

0.00%

0.00%

3

TMF

7.83%

-0.30%

-0.10%

-20.45%

-5.03%

-1.68%

-3

TMV

-8.09%

0.04%

0.01%

6.33%

-9.09%

-3.03%

NASDAQ 100

1

QQQ

1.81%

0.00%

0.00%

29.53%

0.00%

0.00%

3

TQQQ

4.84%

-0.59%

-0.20%

103.97%

15.38%

5.13%

-3

SQQQ

-5.77%

-0.34%

-0.11%

-57.23%

31.36%

10.45%

DJ 30

1

DIA

3.93%

0.00%

0.00%

23.45%

0.00%

0.00%

3

UDOW

11.10%

-0.69%

-0.23%

77.53%

7.18%

2.39%

-3

SDOW

-10.88%

0.91%

0.30%

-49.12%

21.23%

7.08%

Russell 2000

1

IWM

3.93%

0.00%

0.00%

24.26%

0.00%

0.00%

3

TNA

11.57%

-0.22%

-0.07%

74.08%

1.30%

0.43%

-3

TZA

-11.37%

0.42%

0.14%

-55.35%

17.43%

5.81%

S&P Select Energy

1

XLE

-0.76%

0.00%

0.00%

2.58%

0.00%

0.00%

3

ERX

-3.48%

-1.20%

-0.40%

-5.45%

-13.19%

-4.40%

-3

ERY

1.03%

-1.25%

-0.42%

-23.94%

-16.20%

-5.40%

MSCI US REIT

1

VNQ

4.48%

0.00%

0.00%

3.46%

0.00%

0.00%

3

DRN

13.35%

-0.09%

-0.03%

0.60%

-9.78%

-3.26%

-3

DRV

-12.55%

0.89%

0.30%

-20.16%

-9.78%

-3.26%

ARCA Gold Miners

1

GDX

-5.61%

0.00%

0.00%

-13.19%

0.00%

0.00%

3

NUGT

-19.38%

-2.55%

-0.85%

-62.53%

-22.96%

-7.65%

-3

DUST

14.43%

-2.40%

-0.80%

-39.89%

-79.46%

-26.49%

MSCI Emerging

1

EEM

0.61%

0.00%

0.00%

26.64%

0.00%

0.00%

3

EDC

1.25%

-0.58%

-0.19%

79.61%

-0.31%

-0.10%

-3

EDZ

-2.63%

-0.80%

-0.27%

-59.29%

20.63%

6.88%

Gold spot

1

GLD

-0.38%

0.00%

0.00%

-2.48%

0.00%

0.00%

3

UGLD

-1.89%

-0.75%

-0.25%

-16.37%

-8.93%

-2.98%

-3

DGLD

1.09%

-0.05%

-0.02%

0.80%

-6.64%

-2.21%

Silver spot

1

SLV

-1.31%

0.00%

0.00%

-3.19%

0.00%

0.00%

3

USLV

-4.97%

-1.04%

-0.35%

-28.95%

-19.38%

-6.46%

-3

DSLV

2.26%

-1.67%

-0.56%

-13.77%

-23.34%

-7.78%

Wells Fargo BDC

1

BDCS

0.89%

0.00%

0.00%

20.46%

0.00%

0.00%

2

BDCL

0.63%

-1.15%

-0.58%

41.61%

0.69%

0.35%

S&P Div. Aristocrats

1

SDY

4.62%

0.00%

0.00%

13.73%

0.00%

0.00%

2

SDYL

8.44%

-0.80%

-0.40%

27.32%

-0.14%

-0.07%

S&P Biotech Select

1

XBI

4.58%

0.00%

0.00%

30.96%

0.00%

0.00%

3

LABU

13.38%

-0.36%

-0.12%

69.40%

-23.48%

-7.83%

-3

LABD

-14.43%

-0.69%

-0.23%

-75.95%

16.93%

5.64%

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

In 1 month:

  • The worst decays of the month was in leveraged miners, both long and short (NUGT, DUST) due to volatility in this industry.
  • The highest positive monthly drift was in shorting large cap indexes (SPXU, SDOW), thanks to a steady bullish trend with little volatility.

In 1 year:

  • The inverse leveraged miners ETF (NYSEARCA:DUST) has the worst annual decay. The non-leveraged ETF GDX has lost about 13%. Instead of making money, DUST has lost 40%. Repeated swings have resulted in a high beta-slippage. Long miners (NYSEARCA:NUGT), long biotechnology (NYSEARCA:LABU), long and short silver (USLV, DSLV) have also suffered significant negative drifts.
  • The highest positive drift is for the 3x inverse Nasdaq 100 (NASDAQ:SQQQ), followed by the 3x inverse DOW and emerging markets ETFs (SDOW, EDZ), all in large losses. Due to a bullish trend for 1 year, long and short leveraged ETFs based on the S&P 500, Dow Jones, Nasdaq 100, Russell 2000 have a positive drift. The highest positive drift is in the inverse ETFs.
  • It means that hedging a stock portfolio taking a long position in an inverse leveraged stock index ETF (SPXU, SDOW, SQQQ, TZA) was cheaper than shorting the non-leveraged underlying index for a similar market exposure. I have been using SPXU to hedge a part of my stock holdings. However, the real performance of hedging depends on the hedge rebalancing dates. Moreover, Trailing performance is not a guarantee for the future: when volatility comes back, stock index leverage ETFs will suffer a negative drift.

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.

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

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.