The Costs and Benefits of Leveraged ETFs

Abstract

We study the costs and benefits of leveraged ETFs (LETFs), focusing on five determinants of performance: volatility drag, fees, financing costs, which products are launched, and market timing. Long broad-equity-index LETFs generated more than $100 billion in investor gains, including over $40 billion relative to counterfactual investments in the underlying assets, due to modest structural headwinds and rising markets. Single-stock LETFs, however, are launched on stocks near the top of the volatility and past-return distributions. This caters to retail demand for lottery-like payoffs, but it also creates larger volatility drag, higher financing costs, and more risk for poor market-timing.