An Evaluation of Leveraged Exchange Traded Funds

Christian Larsen

Student thesis: Master thesis

Abstract

This master thesis studies the potential added value of investing in a LETF (leveraged exchange traded fund) compared with an unleveraged ETF (exchange traded fund) when both funds track the performance of the same stock index. The potential added value is determined by comparing the Sharpe ratio of the two funds. LETFs could seem attractive to retail investors because they offer a simple way to increase exposure. However, research has shown that the actual returns that investors end up with, from holding LETFs long-term, can be very different from what the investors expect. For the time-period 2008-2019, we found a lower Sharpe ratio for the LETF compared with the ETF, a result consistent with previous studies stating that LETFs can underperform the underlying long-term. To statistically test the findings, we compared the performance of an ETF with that of a portfolio that has the same standard deviation and consists of a LETF, with a leverage factor of two, and a risk-free asset. The results show that the portfolio underperforms the ETF. These findings therefore indicate that LETFs do not add any value compared with the ETF.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages74