Can international LETFs deliver their promised exposure to foreign markets?

This study examines the tracking performance of U.S.-traded International Leveraged Exchanged-traded Funds (ILETFs) that track the following markets: Brazil, China, Europe, Japan, and Mexico. We find that the beta and returns of these ILETFs can deviate dramatically from their naïve expected counterparts. We further develop a comprehensive framework that decomposes an ILETF's return deviation into misperception-related components and tracking error-related components. Our results suggest that daily investors in ILETFs should be mindful of their underexposure to the foreign markets and overexposure to the U.S. market, while longer-term investors should pay special attention to the negative compounding deviation during volatile markets.