The pricing and performance of leveraged exchange-traded funds

Leveraged ETFs are a recent and very successful financial innovation. They provide daily returns that are in a multiple or a negative multiple of the daily returns on a market benchmark. In this paper, we examine the characteristics, trading statistics, pricing efficiency and tracking errors of a sample of leveraged ETFs. We find that these ETFs are traded mainly by retail traders with very short holding periods. Price deviations (from NAV) are small on average, but large premiums and discounts are prone to occur. More interestingly, the behavior of premiums is different between bull (i.e., those with a positive multiple) and bear ETFs (i.e., those with a negative multiple). Our findings are consistent with the argument that the end-of-day rebalancing of the funds' exposures increases market volatility at the close of a trading day. As for tracking errors, they are small for holding periods of up to a week, but become increasingly larger for longer horizons.