Leveraged ETF Decays - Update

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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, SOXL, SOXS, SOXX, SPXU, SPY, SQQQ, TLT, TMF, TMV, TNA, TQQQ, TVIX, TZA, UDOW, UGLD, UPRO, USLV, VNQ, VXX, XBI, XLE
by: Fred Piard
Summary

Theoretical reminder.

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

The worst decays and the best positive drifts.

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.

Where does the decay come from?

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 learn more about beta-slippage and examples.

The leveraged ETF decay looks like an invitation to short sellers. Click here if you want to know why it is bad idea.

Monthly and Yearly Drifts on 12/3/2018

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

1.85%

0.00%

0.00%

5.91%

0.00%

0.00%

3

UPRO

4.28%

-1.27%

-0.42%

5.01%

-12.72%

-4.24%

-3

SPXU

-6.24%

-0.69%

-0.23%

-21.36%

-3.63%

-1.21%

ICE US20+ Tbond

1

TLT

1.79%

0.00%

0.00%

-5.37%

0.00%

0.00%

3

TMF

4.76%

-0.61%

-0.20%

-20.75%

-4.64%

-1.55%

-3

TMV

-4.99%

0.38%

0.13%

16.73%

0.62%

0.21%

NASDAQ 100

1

QQQ

-0.26%

0.00%

0.00%

10.00%

0.00%

0.00%

3

TQQQ

-2.91%

-2.13%

-0.71%

10.92%

-19.08%

-6.36%

-3

SQQQ

-2.52%

-3.30%

-1.10%

-37.58%

-7.58%

-2.53%

DJ 30

1

DIA

1.96%

0.00%

0.00%

7.39%

0.00%

0.00%

3

UDOW

4.44%

-1.44%

-0.48%

8.24%

-13.93%

-4.64%

-3

SDOW

-6.76%

-0.88%

-0.29%

-25.54%

-3.37%

-1.12%

Russell 2000

1

IWM

1.73%

0.00%

0.00%

0.57%

0.00%

0.00%

3

TNA

2.99%

-2.20%

-0.73%

-10.88%

-12.59%

-4.20%

-3

TZA

-6.15%

-0.96%

-0.32%

-10.41%

-8.70%

-2.90%

S&P Select Energy

1

XLE

-1.56%

0.00%

0.00%

-1.68%

0.00%

0.00%

3

ERX

-7.15%

-2.47%

-0.82%

-21.46%

-16.42%

-5.47%

-3

ERY

2.36%

-2.32%

-0.77%

-12.34%

-17.38%

-5.79%

MSCI US REIT

1

VNQ

4.67%

0.00%

0.00%

1.94%

0.00%

0.00%

3

DRN

13.56%

-0.45%

-0.15%

-1.95%

-7.77%

-2.59%

-3

DRV

-12.52%

1.49%

0.50%

-15.67%

-9.85%

-3.28%

ARCA Gold Miners

1

GDX

0.85%

0.00%

0.00%

-14.36%

0.00%

0.00%

3

NUGT

0.53%

-2.02%

-0.67%

-52.87%

-9.79%

-3.26%

-3

DUST

-5.46%

-2.91%

-0.97%

22.12%

-20.96%

-6.99%

MSCI Emerging

1

EEM

4.90%

0.00%

0.00%

-8.95%

0.00%

0.00%

3

EDC

12.59%

-2.11%

-0.70%

-37.56%

-10.71%

-3.57%

-3

EDZ

-15.57%

-0.87%

-0.29%

8.43%

-18.42%

-6.14%

Gold spot

1

GLD

0.34%

0.00%

0.00%

-4.59%

0.00%

0.00%

3

UGLD

0.52%

-0.50%

-0.17%

-20.45%

-6.68%

-2.23%

-3

DGLD

-1.12%

-0.10%

-0.03%

15.24%

1.47%

0.49%

Silver spot

1

SLV

-0.67%

0.00%

0.00%

-14.12%

0.00%

0.00%

3

USLV

-3.99%

-1.98%

-0.66%

-45.90%

-3.54%

-1.18%

-3

DSLV

1.24%

-0.77%

-0.26%

40.40%

-1.96%

-0.65%

Wells Fargo BDC

1

BDCS

0.18%

0.00%

0.00%

0.63%

0.00%

0.00%

2

BDCL

0.07%

-0.29%

-0.15%

-1.46%

-2.72%

-1.36%

S&P Biotech Select

1

XBI

3.21%

0.00%

0.00%

-1.62%

0.00%

0.00%

3

LABU

3.47%

-6.16%

-2.05%

-31.46%

-26.60%

-8.87%

-3

LABD

-16.65%

-7.02%

-2.34%

-34.24%

-39.10%

-13.03%

PHLX Semicond.

1

SOXX

3.25%

0.00%

0.00%

-1.36%

0.00%

0.00%

3

SOXL

6.32%

-3.43%

-1.14%

-26.22%

-22.14%

-7.38%

-3

SOXS

-13.58%

-3.83%

-1.28%

-27.38%

-31.46%

-10.49%

VIX ST Futures

1

VXX

-7.88%

0.00%

0.00%

7.88%

0.00%

0.00%

2

TVIX

-18.53%

-2.77%

-1.39%

-45.65%

-61.41%

-30.71%

BDCL and TVIX are exchange-traded notes. ETNs entail additional counterparty risks.

In 1 month:

  • The leveraged biotechnology ETFs long (LABU) and inverse (LABD) have the 2 worst monthly decays due to high daily returns volatility in this industry, with a drift about -2% normalized to 1x the underlying index exposure.

  • The highest positive monthly drift is for the leveraged inverse REITs (DRV), with a moderate drift of +0.5% normalized to 1x the underlying index exposure.

In 1 year:

  • The worst decay was in leveraged volatility (TVIX) with a normalized drift of -31%. The inverse leveraged ETF in biotechnology (LABD) and semiconductors (SOXS) have suffered normalized decays over 10% on the underlying index exposure.

  • The highest positive drift is for the inverse leveraged gold ETF (DGLD) with a small +0.5% drift normalized to the underlying index.

Keep also in mind that shorting an asset or buying an inverse product (leveraged or not) implies an additional systematic decay due to inflation. Whatever the price action, a short position (non-leveraged) suffers a negative bias equal to the inflation rate.

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