The dynamics of leveraged ETFs returns: a panel data study

Leveraged exchange-traded funds (LETFs) are limited liability securities that allow investors to take daily constant leverage bets on a reference index. This work proposes a new empirical design to investigate the dynamics of quarterly LETFs returns. Rather than relying on fund-by-fund overlapping regressions, as in existing literature, the paper exploits a large panel of non-overlapping data covering the whole universe of Proshares, the US primary LETFs provider. Overall, it is found that the variables prescribed by theory broadly explain cross-sectional variability. It is also found that inverse LETFs and more generally, leveraged funds operating in asset classes like international equity, bonds and commodities underperform theoretical predictions. This underperformance is mainly attributed to frictions in the process of implementing the required daily leverage.