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Leveraged ETFs Decays: Warning Signal For SPXU


  • Why do leveraged ETFs drift?
  • The best and the worst drifts.
  • A warning signal for SPXU.
  • This idea was discussed in more depth with members of my private investing community, Quantitative Risk & Value. Get started today »

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.

Why do leveraged ETFs drift?

Leveraged ETFs often underperform their underlying indexes 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 source 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.

Monthly and yearly drift watchlist

A few simple formulas and data definitions are necessary before going to the point. “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%.




1-month Return

1-month ETFdrift

1-month TradeDrift

1-year Return

1-year ETFdrift

1-year TradeDrift

S&P 500

























ICE US20+ Tbond









Since 2015, Quantitative Risk & Value (QRV) provides a systemic risk indicator and strategies based on it. SPXU may be used in hedging tactics scaled according to the market’s risk level and the investor’s risk tolerance. In a world of probabilities, it is a more realistic approach than just risk on/risk off.  Get started with a two-week free trial and see how QRV can improve your investing decisions.

This article was written by

Fred Piard profile picture

Fred Piard, PhD. is a quantitative analyst and IT professional with over 30 years of experience working in technology. He is the author of three books and has been investing in data-driven systematic strategies since 2010.

Fred runs the investing group Quantitative Risk & Value where he shares a portfolio invested in quality dividend stocks, and companies at the forefront of tech innovation. Fred also supplies market risk indicators, a real estate strategy, a bond strategy, and an income strategy in closed-end funds. Learn more.

Analyst’s Disclosure: I am/we are long TLT. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Greedy Chicken profile picture
Great article, @Fred Piard. You wrote that "Rebalancing may offset a part of the decay in a volatile market." I'm wondering if anyone has tried using a leveraged and inverse pair, say $UPRO and $SPXU, rebalanced frequently, as a way to profit from any one way trends.
For instance, over the period you mentioned (2/21 - 2/28), based on prices used in StockCharts.com perfcharts (stockcharts.com/...) (daily closing prices, presumably), one was up 40% and one was down 31%, leaving a (40 - 31)/2 = 4 1/2% net profit on the pair trade. Of course once the trend reverses, both funds suffer from volatility drag and you end up losing money.

But right now I have a smaller than usual allocation to equities, and I'm about equally worried that I have too much if the down trend continues, or too little if the trend reverses. If they tread water, I'm happy collecting some dividends and seeing reduced portfolio volatility.

I'm not sure how hard it is in practice to harvest volatility like this, and would like to hear anyone else's thoughts on the subject.
Greedy Chicken profile picture
On the other hand, while the 1x short ETF ($SH) was up 5.8% today (vs. -5.2 for the S&P), the 2x short ($SDS) and 3x short ($SPXU) were only up 9.5% and 11.5% -- so not meeting their daily return objectives during market dislocations is another big risk to the proposed strategy.
FINMAR profile picture
this! although good points and data presented, one more big leg down before exiting. Key is that this is not bull market protection this is opportunity when people forget what overvalued looks like.
LOL, look at this ticker today. Great micro view, horrible macro view. GL
Always a good article. Hard for investors to quantify this on our own and then you lose track of the effect it is having. Would be good to include Uvxy. I believe you have in the past. I think it is used extensively.
Would love to hear about UWT with the recent dump in CL. Learning to stay away from lev ETF
mREITs profile picture
I like this article. Hope you do an examination on MORL and its cousin MRRL.
There seems to be quite some debate on if it's ok to hold onto these leveraged ETNs long-term, or not because of decay.

I have read that people who bought MORL initially have already had their own purchase paid-for-itself, and it still continues on paying out monthly.
Fred Piard profile picture
@mREITs I have written an article on it 3 years ago:
I might do it again with udated data
Comfortably Numb profile picture
I have been using SPXU, SQQQ and UVXY extensively. It's worked just as advertised, and has provided great downside protection.

It's not a buy and hold for me, so I can live with the decay.
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