Portfolio insurance using leveraged ETFs

Authors

  • Jeffrey George Department of Economics and Finance, East Tennessee State University
  • William J. Trainor, Jr. Department of Economics and Finance, East Tennessee State University

DOI:

https://doi.org/10.61190/fsr.v26i4.3373

Keywords:

Leveraged Exchange Traded Funds, Portfolio insurance

Abstract

This study examines the use of Leveraged Exchange Traded Funds (LETFs) within a constant proportional portfolio insurance (CPPI) strategy. The advantage of using LETFs in such a strategy is that it allows a greater percentage of the portfolio to be invested in the risk-free rate relative to a traditional CPPI. Where a standard CPPI strategy may require 50% of the portfolio to be invested in equities, using a 2x LETF only requires 25%, and a 3x LETF only requires 16.7% to attain the same effective exposure to equities. Results show when the risk-free asset is yielding at least 3% or the 1 year minus 90-day Treasury exceeds 1%, the use of LETFs within a CPPI framework results in annual returns approximately 1–2% higher with better Sharpe, Sortino, Omega, and Cumulative Prospect Values while reducing Value at Risk (VaR) and Excess Shortfall (ES) below VaR.

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Published

2017-12-30

How to Cite

George, J., & Trainor, Jr., W. J. (2017). Portfolio insurance using leveraged ETFs. Financial Services Review, 26(4), 387–403. https://doi.org/10.61190/fsr.v26i4.3373

Issue

Vol. 26 No. 4 (2017): Winter 2017

Section

New Original Submission

License

Copyright (c) 2017 Academy of Financial Services

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