Leveraged ETF Decays - Update

|
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, VIXY, VNQ, XBI, XLE
by: Fred Piard
Summary

Theoretical reminder.

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

The worst and the best ETF 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, and 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 5/1/2019

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

4.09%

0.00%

0.00%

12.44%

0.00%

0.00%

3

UPRO

11.81%

-0.46%

-0.15%

24.54%

-12.78%

-4.26%

-3

SPXU

-10.62%

1.65%

0.55%

-33.01%

4.31%

1.44%

ICE US20+ Tbond

1

TLT

-1.99%

0.00%

0.00%

6.87%

0.00%

0.00%

3

TMF

-6.56%

-0.59%

-0.20%

13.75%

-6.86%

-2.29%

-3

TMV

6.50%

0.53%

0.18%

-17.48%

3.13%

1.04%

NASDAQ 100

1

QQQ

5.50%

0.00%

0.00%

17.95%

0.00%

0.00%

3

TQQQ

16.64%

0.14%

0.05%

35.63%

-18.22%

-6.07%

-3

SQQQ

-14.45%

2.05%

0.68%

-48.84%

5.01%

1.67%

DJ 30

1

DIA

2.63%

0.00%

0.00%

11.79%

0.00%

0.00%

3

UDOW

7.19%

-0.70%

-0.23%

21.88%

-13.49%

-4.50%

-3

SDOW

-7.12%

0.77%

0.26%

-32.29%

3.08%

1.03%

Russell 2000

1

IWM

3.40%

0.00%

0.00%

3.59%

0.00%

0.00%

3

TNA

9.51%

-0.69%

-0.23%

-4.68%

-15.45%

-5.15%

-3

TZA

-9.64%

0.56%

0.19%

-19.19%

-8.42%

-2.81%

S&P Select Energy

1

XLE

-0.02%

0.00%

0.00%

-7.65%

0.00%

0.00%

3

ERX

-0.84%

-0.78%

-0.26%

-35.26%

-12.31%

-4.10%

-3

ERY

-0.61%

-0.67%

-0.22%

5.33%

-17.62%

-5.87%

MSCI US REIT

1

VNQ

-0.16%

0.00%

0.00%

18.48%

0.00%

0.00%

3

DRN

-2.26%

-1.78%

-0.59%

44.64%

-10.80%

-3.60%

-3

DRV

0.87%

0.39%

0.13%

-43.14%

12.30%

4.10%

ARCA Gold Miners

1

GDX

-6.82%

0.00%

0.00%

-7.61%

0.00%

0.00%

3

NUGT

-20.67%

-0.21%

-0.07%

-40.86%

-18.03%

-6.01%

-3

DUST

21.57%

1.11%

0.37%

-4.06%

-26.89%

-8.96%

MSCI Emerging

1

EEM

2.35%

0.00%

0.00%

-5.03%

0.00%

0.00%

3

EDC

5.97%

-1.08%

-0.36%

-28.10%

-13.01%

-4.34%

-3

EDZ

-6.41%

0.64%

0.21%

0.89%

-14.20%

-4.73%

Gold spot

1

GLD

-0.66%

0.00%

0.00%

-3.43%

0.00%

0.00%

3

UGLD

-2.67%

-0.69%

-0.23%

-17.86%

-7.57%

-2.52%

-3

DGLD

2.41%

0.43%

0.14%

13.71%

3.42%

1.14%

Silver spot

1

SLV

-1.13%

0.00%

0.00%

-9.96%

0.00%

0.00%

3

USLV

-4.53%

-1.14%

-0.38%

-37.98%

-8.10%

-2.70%

-3

DSLV

3.79%

0.40%

0.13%

27.42%

-2.46%

-0.82%

Wells Fargo BDC

1

BDCS

2.77%

0.00%

0.00%

10.87%

0.00%

0.00%

2

BDCL

5.95%

0.41%

0.21%

17.23%

-4.51%

-2.26%

S&P Biotech Select

1

XBI

-5.90%

0.00%

0.00%

-3.49%

0.00%

0.00%

3

LABU

-18.80%

-1.10%

-0.37%

-38.10%

-27.63%

-9.21%

-3

LABD

16.48%

-1.22%

-0.41%

-35.89%

-46.36%

-15.45%

PHLX Semicond.

1

SOXX

11.62%

0.00%

0.00%

25.60%

0.00%

0.00%

3

SOXL

36.72%

1.86%

0.62%

50.66%

-26.14%

-8.71%

-3

SOXS

-28.92%

5.94%

1.98%

-65.28%

11.52%

3.84%

VIX ST Futures

1

VIXY

-12.07%

0.00%

0.00%

-38.41%

0.00%

0.00%

2

TVIX

-24.59%

-0.45%

-0.23%

-72.57%

4.25%

2.13%

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

In 1 month:

  • There was no large decay in April. The leveraged ETF in real estate (DRN) has the worst monthly decay with a relatively small drift: about -0.6% normalized to 1x the underlying index exposure.
  • The highest positive monthly drift is in the inverse leveraged semiconductors ETF (SOXS) with a drift of almost 2% normalized to 1x the underlying index exposure.

In 1 year:

  • The worst decays have occurred in leveraged biotechnology ETFs long (LABU) and inverse (LABD), with normalized drifts about -9% and -15%.
  • The highest positive drift is for the inverse leveraged real estate ETF (DRV) with a 4.1% normalized drift, in a large loss. The inverse leveraged semiconductors ETF (SOXS) is not far behind.

Due to stock volatility in 2018, leveraged long ETFs in major stock indexes are in negative drift for the last 12 months. However, the 12-month drifts of inverse leveraged ETFs in the S&P 500 (SPXU), Dow Jones (SDOW) and Nasdaq 100 (SQQQ) are positive. It confirms something I have written since 2015: despite the bad reputation of leveraged ETFs, SPXU may be used as hedging instrument with a moderate risk and cost. Investors having used SPXU for several years are happy with that: check here the drifts on 3 years and 7 years.

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