Leveraged and Inverse ETF in Taiwan, Japan and Korea and the Source of Tracking Error

The trading volume of leveraged and inverse ETFs became larger but they were still new financial products to the Asian. They grew fast in AUM and the weight in ETF kept rising. Accordingly, this paper tries to examine the tracking performance of the leveraged and inverse ETFs. This paper is composed of two parts. The first part examines whether the leveraged and inverse ETFs can reach the goal to provide the promised return in the short-term and in the long-term. The sample includes 12 leveraged and inverse ETFs from Taiwan, Japan and Korea. The holding period includes 1-day, 2-day, 5-day, 10-day, 30-day and 60-day. The second part analyzes the source of the tracking error and examines the effect of path dependence on short-term and long –term. Besides, perform analysis on the effect of the value destruction. The variables include returns and volatility of the underlying index. The factors which influence tracking performance might be the correlation coefficient between return of underlying index in time t and return in time t-1, return and volatility of the underlying index. The possible factors include the tools to track the performance, transaction costs, the volatility in exchange rate, the frequency to rebalance and the cash drag.