Just Say No to Leveraged ETFs

Vol. 20, No. 3, 2022
by Ziemowit Bednarek and Pratish Patel

The daily return on a positive Leveraged Exchange-Traded Fund (LETF) is a multiple of its benchmark. We compare the risk–reward trade-off of investing in an LETF relative to the benchmark. The main contribution is straightforward: Sharpe Ratio (SR) adequately and sufficiently captures the trade-off. An LETF return distribution differs from the benchmark by location and scale. As a result, LETF and benchmark have the same higher-order cumulants. A wide variety of coherent performance measures monotonically depend on the SR. For all horizons, the LETF SR is lower than the benchmark. We find strong and robust empirical support for these predictions.