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Article

Do Leveraged and Inverse ETFs Converge to Zero?

Andrew B. Carver
ETFs and Indexing Fall 2009, 2009 (1) 144-149
Andrew B. Carver
is an assistant professor at The College of New Jersey, School of Business in Ewing, NJ.
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  • For correspondence: carver@tcnj.edu
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Abstract

Leveraged ETFs can perform poorly over longer time horizons, even when the underlying index performs well. This longer-term underperformance results from ill-timed rebalancing and the geometric nature of returns compounding. The author uses the concept of a growth-optimized portfolio to show that highly levered ETFs (3x and inverse ETFs) are likely to converge to zero over longer time horizons. When based on high-volatility indexes, 2x leveraged ETFs can also be expected to decay to zero; however, under moderate market conditions, these ETFs should avoid the fate of their more highly leveraged counterparts. The author uses these ideas to suggest that an adaptive leverage ETF might produce more attractive results over longer time horizons.

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ETFs and Indexing: 2009 (1)
Exchange Traded Funds
Vol. 2009, Issue 1
Fall 2009
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Do Leveraged and Inverse ETFs Converge to Zero?
Andrew B. Carver
ETFs and Indexing Sep 2009, 2009 (1) 144-149;

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Do Leveraged and Inverse ETFs Converge to Zero?
Andrew B. Carver
ETFs and Indexing Sep 2009, 2009 (1) 144-149;
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  • Article
    • Abstract
    • OPTIMAL GROWTH THEORY: LESSONS FOR BLACKJACK AND THE MARKET
    • THE GROWTH CHARACTERISTICS OF LEVERAGED, INVERSE AND DE-LEVERED ETFs
    • HOW IMPORTANT IS REBALANCING FREQUENCY FOR ETF GROWTH?
    • THE CASE FOR AN ADAPTIVE LEVERAGE ETF
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