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, SLV, SPXU, SPY, SQQQ, TLT, TMF, TMV, TNA, TQQQ, TZA, UDOW, UGLD, UPRO, USLV, UVXY, VNQ, VXX, XBI, XLE
by: Fred Piard
Summary

Theoretical 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 12/11/2017

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

2.47%

0.00%

0.00%

20.31%

0.00%

0.00%

3

UPRO

6.99%

-0.42%

-0.14%

65.69%

4.76%

1.59%

-3

SPXU

-6.83%

0.58%

0.19%

-42.44%

18.49%

6.16%

ICE US20+yr Tbond

1

TLT

0.47%

0.00%

0.00%

9.23%

0.00%

0.00%

3

TMF

0.87%

-0.54%

-0.18%

23.17%

-4.52%

-1.51%

-3

TMV

-1.92%

-0.51%

-0.17%

-26.87%

0.82%

0.27%

NASDAQ 100

1

QQQ

0.13%

0.00%

0.00%

31.78%

0.00%

0.00%

3

TQQQ

-0.27%

-0.66%

-0.22%

114.34%

19.00%

6.33%

-3

SQQQ

-0.58%

-0.19%

-0.06%

-57.97%

37.37%

12.46%

DJ 30

1

DIA

3.71%

0.00%

0.00%

26.91%

0.00%

0.00%

3

UDOW

10.89%

-0.24%

-0.08%

94.46%

13.73%

4.58%

-3

SDOW

-10.38%

0.75%

0.25%

-51.10%

29.63%

9.88%

Russell 2000

1

IWM

2.86%

0.00%

0.00%

11.20%

0.00%

0.00%

3

TNA

8.01%

-0.57%

-0.19%

27.52%

-6.08%

-2.03%

-3

TZA

-8.30%

0.28%

0.09%

-32.73%

0.87%

0.29%

S&P Select Energy

1

XLE

-0.77%

0.00%

0.00%

-6.40%

0.00%

0.00%

3

ERX

-3.20%

-0.89%

-0.30%

-25.40%

-6.20%

-2.07%

-3

ERY

2.05%

-0.26%

-0.09%

11.54%

-7.66%

-2.55%

MSCI US REIT

1

VNQ

-0.85%

0.00%

0.00%

5.81%

0.00%

0.00%

3

DRN

-2.87%

-0.32%

-0.11%

10.30%

-7.13%

-2.38%

-3

DRV

2.43%

-0.12%

-0.04%

-19.98%

-2.55%

-0.85%

ARCA Gold Miners

1

GDX

-5.29%

0.00%

0.00%

1.32%

0.00%

0.00%

3

NUGT

-17.36%

-1.49%

-0.50%

-27.06%

-31.02%

-10.34%

-3

DUST

17.23%

1.36%

0.45%

-38.87%

-34.91%

-11.64%

MSCI Emerging

1

EEM

-1.80%

0.00%

0.00%

28.38%

0.00%

0.00%

3

EDC

-6.09%

-0.69%

-0.23%

94.57%

9.43%

3.14%

-3

EDZ

4.70%

-0.70%

-0.23%

-56.54%

28.60%

9.53%

Gold spot

1

GLD

-2.59%

0.00%

0.00%

6.19%

0.00%

0.00%

3

UGLD

-8.50%

-0.73%

-0.24%

10.25%

-8.32%

-2.77%

-3

DGLD

8.00%

0.23%

0.08%

-19.43%

-0.86%

-0.29%

Silver spot

1

SLV

-6.85%

0.00%

0.00%

-7.31%

0.00%

0.00%

3

USLV

-21.14%

-0.59%

-0.20%

-33.78%

-11.85%

-3.95%

-3

DSLV

23.56%

3.01%

1.00%

6.94%

-14.99%

-5.00%

Wells Fargo BDC

1

BDCS

-0.11%

0.00%

0.00%

1.55%

0.00%

0.00%

2

BDCL

-0.30%

-0.08%

-0.04%

1.65%

-1.45%

-0.73%

S&P Biotech Select

1

XBI

0.87%

0.00%

0.00%

35.50%

0.00%

0.00%

3

LABU

0.80%

-1.81%

-0.60%

107.62%

1.12%

0.37%

-3

LABD

-4.90%

-2.29%

-0.76%

-71.13%

35.37%

11.79%

VIX Short Term Fut.

1

VXX

-9.54%

0.00%

0.00%

-71.15%

0.00%

0.00%

2

UVXY

-19.44%

-0.36%

-0.18%

-93.52%

48.78%

24.39%

BDCL is an Exchange-Traded Note. ETNs entail additional counterparty risks.

In 1 month:

  • The largest decays are in Biotechnology short LABD and long LABU, followed by long gold miners (NUGT). These decays are moderate (between -0.5% and -0.75% normalized at 1x the underlying index exposure).

  • The highest positive drift was in short silver (DSLV) with about 1% normalized at 1x the underlying index exposure.

In 1 year:

  • The two worst decays have been in leveraged gold miners, long NUGT and short DUST. Both are in loss by respectively 27% and 39%, whereas the underlying GDX is close to break-even. Repeated swings in the index have resulted in a high beta-slippage on both sides.

  • The highest positive drift in 1 year is for the leveraged VIX Short-Term Futures ETF (UVXY) in an asymptotic loss. Then come the inverse leveraged ETFs in Biotechnology (LABD) and Nasdaq 100 (SQQQ).

  • Due to a bullish trend with little volatility, both long and short leveraged ETFs based on the large cap indexes Dow Jones, S&P 500 and Nasdaq 100 have a positive drift. This is not the case for the more volatile small cap index Russell 2000.

  • As a result, the inverse leveraged stock index ETFs have been cheaper hedging instruments 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 taking into account the systemic risk.

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.

Additional disclosure: I am net long in stocks.