Abstract
As the market headed toward record levels in 2007, a new breed of ETF's-giving leveraged exposure-was proving a popular. Then, as the market started to fall during late 2007, and again in 2008, positions in these double long and short ETF's grew to over $16bn-proving that, despite the volatility, leverage remained hugely popular with investors. Now, there are over 70 of these leveraged ETF's-covering different regions, sectors, asset classes and even more (3x) leverage. By understanding how the underlying leveraged indexes are calculated, and simulating the returns of these ETF's, we show that expected performance is quite different from 2x the market-as many investors have now started to notice! Despite high management fees these ETF's do offer cheap access to institutional stock and cash borrow rates. However given that markets rarely trend in one direction for long, our analysis shows that these ETF's are likely to be better for short term traders, than longer term investors.
- © 2008 Pageant Media Ltd
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