An Investigation of Short- and Long-term Tracking Performance of Leveraged and Inverse ETFs
Date Issued
2015
Date
2015
Author(s)
Su, Ting-Feng
Abstract
This paper is composed of two parts. The first part of the paper examines long-term and short-term tracking performances of four leveraged and inverse ETFs listed on the stock exchange in Taiwan. At 1% level of significance, daily tracking performance of the leveraged and inverse ETFs significantly deviate from the investment objectives of the funds. The cumulative returns of the leveraged and inverse ETFs over holding period are also significantly different from positive or negative multiple of cumulative returns of underlying index over corresponding period. There are no significant asymmetry in positive and negative returns. The second part simulates the dynamic rebalancing mechanism of leveraged and inverse ETFs using different length of adjustment period on portfolios subject to needed exposure and net asset value constraints. Although daily returns of all of the portfolios dynamically rebalanced on any length of period basis are significantly different from multiple of index daily return, the portfolio allocated by the integer solution with minimized cash amount tracking two times underlying index daily return performs better than the leveraged ETFs of Taiwan. The basis risk and standardization of futures, the bargaining power of fund managers, the percentage of cash amount that takes up, path dependence on underlying index and whether underlying index of investment vehicle is consistent with that of leveraged and inverse ETFs can affect tracking performances of leveraged and inverse ETFs.
Subjects
leveraged ETF
inverse ETF
tracking performance
rebalancing mechanism
Type
thesis
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