How appropriate are leveraged ETFs for long-term investments?

Business & Finance, Finance & Investing, Finance
Cover of the book How appropriate are leveraged ETFs for long-term investments? by Dennis Hummel, GRIN Verlag
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Author: Dennis Hummel ISBN: 9783656912972
Publisher: GRIN Verlag Publication: March 5, 2015
Imprint: GRIN Verlag Language: English
Author: Dennis Hummel
ISBN: 9783656912972
Publisher: GRIN Verlag
Publication: March 5, 2015
Imprint: GRIN Verlag
Language: English

Bachelor Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 2,7, University of Mannheim (Area Banking, Finance, and Insurance), language: English, abstract: Leveraged exchange-traded funds (LETFs) track the development of an underlying index with a certain multiplier. For compounding and non-compounding effects this is only guaranteed on a daily basis which raises concerns about their performance in the long run. After analyzing the LETF market in Germany, I ran a Monte-Carlo simulation of three multipliers across five different holding periods (one week to 4 years) to estimate the tracking error and I found that the multipliers deviate substantially for holding periods longer than one month. Using the rebalancing method with a 5% trigger proposed by other researchers, I was able to reduce the tracking error to negligible levels. In a nutshell, a buy-and-hold strategy using LETFs does not guarantee the multiplier in the long run and I recommend to invest directly in the index to participate from long-term stock market growth.

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Bachelor Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 2,7, University of Mannheim (Area Banking, Finance, and Insurance), language: English, abstract: Leveraged exchange-traded funds (LETFs) track the development of an underlying index with a certain multiplier. For compounding and non-compounding effects this is only guaranteed on a daily basis which raises concerns about their performance in the long run. After analyzing the LETF market in Germany, I ran a Monte-Carlo simulation of three multipliers across five different holding periods (one week to 4 years) to estimate the tracking error and I found that the multipliers deviate substantially for holding periods longer than one month. Using the rebalancing method with a 5% trigger proposed by other researchers, I was able to reduce the tracking error to negligible levels. In a nutshell, a buy-and-hold strategy using LETFs does not guarantee the multiplier in the long run and I recommend to invest directly in the index to participate from long-term stock market growth.

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