Leveraged ETF 2.0

Multifactorial LETF slide presentation.

Ever since leveraged ETFs were first made available to US investors in 2006, their long-term return distributions have caused widespread misunderstanding and frustration.  The daily return objectives seemed simple enough, but real-world results over periods such as 3 months and 1 year confounded investors. Although many finance professionals had dealt with ETFs for decades, such experience was exclusive to the special case of leverage equal to +1. LETFs represent a generalization that was not well-understood.

Fund sponsors want to offer products long-term investors find attractive. Recently introduced alternatives to daily-rebalanced, constant-leverage LETFs have been failures due to R&D efforts based on individual examples and general rules of thumb.

  • Monthly Rebalancing: Despite 95% fewer rebalancing actions, these funds provide to investors an annual return distribution almost exactly the same as daily rebalancing.
  • Lifetime Funds: These lack fungibility (eliminating the advantageous market-pricing mechanism of LETFs) and ask investors to risk a complete loss of equity.

The basis for these funds is the misguided notion that the frequency of rebalancing actions completely specifies their long-term returns. Introducing such funds has accomplished nothing more than expose a prevailing lack of facility with the mathematics of leverage.

Sand Key Research has responded to the challenge of long-term LETF returns by employing a mathematically tractable paradigm for LETF specification. Our patent-pending method for deriving LETF portfolio management protocols makes it possible for ETP sponsors realize any mathematically possible investor utility profile, including those satisfying the utility profiles of long-term investors.