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Leveraged and inverse ETFs could cause investment shortfall, report finds


Investors who hold leveraged and inverse exchange-traded funds for periods longer than a day expose themselves to substantial risk that the holding period returns will deviate from the returns to a leveraged or inverse investment in the index, according to a report from Securities Litigation and Consulting Group.

The report, by Ilan Guedj, Guohua Li and Craig McCann, reports estimated distributions of holding periods for investors in actual leveraged and inverse ETFs using standard stock trading models found in the literature.

It estimates the investment shortfall incurred by investors who hold leveraged and inverse compared to investing in a simple margin account to generate the same leveraged or short investment strategy to be as much as three per cent of their investment in less than three weeks, an annualiaed cost of 50 per cent. 

The study also discusses the viability of leveraged and inverse leveraged ETFs that rebalance less often than daily and calculate their costs to investors.

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