A portfolio of leveraged exchange traded funds

Authors

  • William J. Trainor, Jr. East Tennessee State University, Department of Economics and Finance
  • Indudeep Chhachhi Western Kentucky University, Department of Finance
  • Christopher L. Brown Western Kentucky University, Department of Finance

DOI:

https://doi.org/10.61190/fsr.v28i1.3414

Keywords:

Leveraged exchange traded funds, Diversified portfolios

Abstract

This study demonstrates how a portfolio of leveraged exchange traded funds (LETFs) targeting a unit exposure to their underlying indexes outperforms a portfolio using traditional ETFs while simultaneously reducing downside risk. By extension, a 3x LETF portfolio designed to mimic 2x LETFs outperforms the underlying 2x LETF portfolio. The results are primarily a function of LETFs borrowing short while the investor lends the additional wealth generated from this leverage in one- to seven-year Treasury bonds or similar type of assets. For every one percent earned above the implied borrowing rate, a portfolio of 2x and 3x LETFs outperforms a traditional portfolio by 0.41% and 0.63%, respectively, corresponding roughly to the additional return on the 50% and 67% of the wealth invested in bonds. More than 90% of LETFs outperformance is explained by the borrowing lending differential.

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Published

2020-03-30

How to Cite

Trainor, Jr., W. J., Chhachhi, I., & Brown, C. L. (2020). A portfolio of leveraged exchange traded funds. Financial Services Review, 28(1), 35–48. https://doi.org/10.61190/fsr.v28i1.3414

Issue

Vol. 28 No. 1 (2020): Spring 2020

Section

New Original Submission

License

Copyright (c) 2019 Academy of Financial Services

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