SPXL And Leveraged ETFs: November Dashboard
Summary
- Leveraged ETFs are unpredictable.
- A drift dashboard with 22 of them.
- SPXL drift history.
- Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »
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The Direxion Daily S&P 500 Bull 3x Shares ETF (NYSEARCA:SPXL) is one of the most popular instruments to trade in bullish market conditions. Its daily 3X leverage factor is a source of drift, which may be positive or negative. It must be closely monitored to detect changes in the drift regime. This article explains what "drift" means, quantifies it in more than 20 leveraged ETFs and shows historical data on SPXL
Why do leveraged ETFs drift?
Leveraged ETFs often underperform their underlying index leveraged by the same factor. The decay has essentially four reasons: beta-slippage, roll yield, tracking errors, and management costs. Beta-slippage is the main reason in equity leveraged ETFs. However, when an asset is in a steady trend, leveraged ETFs can bring an excess return instead of a decay. You can follow this link to learn more about beta-slippage.
Monthly and yearly drift watchlist
A few definitions are necessary before going to the point. “Return” is the return of a leveraged ETF in a given time interval, including dividends. “IndexReturn” is the return of a non-leveraged ETF on the same underlying asset in the same time interval, including dividends. “Lv” is the leveraging factor. “Abs” is the absolute value operator. “Drift” is the drift of a leveraged ETF normalized to the underlying index exposure in a time interval. It is calculated as follows:
Drift = (Return - (IndexReturn x Lv))/ Abs(Lv)
“Decay” means negative drift. “Month” stands for 21 trading days, “year” for 252 trading days.
Index | Lv | Ticker | 1-month Return | 1-month Drift | 1-year Return | 1-year Drift |
S&P 500 | 1 | 7.02% | 0.00% | 41.14% | 0.00% | |
3 | 21.90% | 0.28% | 162.45% | 13.01% | ||
-3 | -19.04% | 0.67% | -68.13% | 18.43% | ||
ICE US20+ Tbond | 1 | 2.47% | 0.00% | -5.81% | 0.00% | |
3 | 7.08% | -0.11% | -22.22% | -1.60% | ||
-3 | -8.03% | -0.21% | 5.86% | -3.86% | ||
NASDAQ 100 | 1 | 7.86% | 0.00% | 40.45% | 0.00% | |
3 | 24.56% | 0.33% | 145.84% | 8.16% | ||
-3 | -21.32% | 0.75% | -70.93% | 16.81% | ||
DJ 30 | 1 | 5.93% | 0.00% | 36.70% | 0.00% | |
3 | 18.31% | 0.17% | 139.58% | 9.83% | ||
-3 | -16.45% | 0.45% | -65.04% | 15.02% | ||
Russell 2000 | 1 | 4.25% | 0.00% | 48.40% | 0.00% | |
3 | 12.47% | -0.09% | 178.62% | 11.14% | ||
-3 | -12.97% | -0.07% | -77.46% | 22.58% | ||
MSCI US REIT | 1 | 7.13% | 0.00% | 46.47% | 0.00% | |
3 | 22.05% | 0.22% | 186.09% | 15.56% | ||
-3 | -19.51% | 0.63% | -72.69% | 22.24% | ||
MSCI Emerging | 1 | 1.07% | 0.00% | 14.27% | 0.00% | |
3 | 2.16% | -0.35% | 31.27% | -3.85% | ||
-3 | -4.32% | -0.37% | -45.72% | -0.97% | ||
Gold spot | 1 | 1.48% | 0.00% | -4.99% | 0.00% | |
2 | 2.99% | 0.01% | -14.32% | -2.17% | ||
-2 | -3.48% | -0.26% | 2.66% | -3.66% | ||
Silver spot | 1 | 7.65% | 0.00% | 1.75% | 0.00% | |
2 | 16.32% | 0.51% | -10.16% | -6.83% | ||
-2 | -15.43% | -0.06% | -30.71% | -13.61% | ||
S&P Biotech Select | 1 | -0.72% | 0.00% | 8.49% | 0.00% | |
3 | -3.44% | -0.43% | -7.15% | -10.87% | ||
-3 | 0.09% | -0.69% | -58.18% | -10.90% | ||
PHLX Semicond. | 1 | 6.45% | 0.00% | 54.46% | 0.00% | |
3 | 19.01% | -0.11% | 173.28% | 3.30% | ||
-3 | -18.79% | 0.19% | -83.95% | 26.48% |
The leveraged inverse biotechnology ETF (LABD) has the worst (but moderate) monthly decay of this list with a drift of -0.69%. The highest positive drift is +0.75% for the inverse leveraged Nasdaq 100 ETF (SQQQ).
The worst 1-year decay is in the inverse leveraged silver ETF (ZSL) with -13.61%. The inverse leveraged semiconductors ETF (SOXS) has the highest positive drift on the same period: +26.48% (in a large loss).
Positive drift is subsequent to a steady trend in the underlying asset, whatever the trend direction and the ETF direction. It means positive drift may come with a gain or a loss for the ETF. For example, you can see in the table above that leveraged ETFs in the S&P 500, Nasdaq 100, Dow Jones, Russell 2000 and REITs have a positive drift on a trailing year (both long and inverse ones).
Negative drift comes with daily return volatility (“whipsaw”). Whipsaw happens more often in downtrends of the underlying asset.
SPXL drift history
The next chart plots the 12-month drift of SPXL since inception (11/05/2008). The 12 months of data prior to inception that are necessary for the calculation have been inferred from SPY daily returns.
12-month drift of SPXL since inception. Chart: author; data: Portfolio123
The historical average 12-month drift is negative: -1.3%. It means SPXL has suffered a decay, but it was dwarfed by the bullish trend: since inception SPXL gained 3650% (32.2% annualized).
The drift went in negative territory in the March 2020 meltdown due to whipsaw in the index daily returns. It jumped to 31% in positive territory in April 2021, when the bad period went out of the look-back interval. The stock market had one of the strongest rallies in history, leading to a high positive slippage, despite a few moderate corrections. While SPY returned about 39.2% in one year (with dividend reinvested), SPXL went up 161.9%. It is about four times the underlying index return. It shows the good side of beta-slippage in a bullish trend. The chart also shows that SPXL 12-month drift has sometimes been negative during more than 18 months, and went down to an extreme of -20%.
Numbers are much worse since January 1999 with synthetic prices. On this period with two deep bear markets, SPXL annualized return would have been inferior to the non-leveraged index (5.96% vs. 7.88% for SPY). It includes a drawdown of -98%. It’s a clear warning against a buy-and-hold strategy.
The next chart plots the hypothetical drift since January 2000 using synthetic prices before inception. The historical average yearly drift is -2.0%.
12-month drift of since January 2000 (synthetic prices). Chart: author.
In conclusion, leveraged ETFs are only for investors and traders with a good understanding of the products behind the advertised leveraging factor. Like for any ETF, read the prospectus, and if you have a doubt, stay away.
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