Leveraged ETFs and beta slippage
Leveraged ETFs aim to multiple the gains of some index by a fixed factor. The focus of this article is on leveraged ETFs that work on daily gains.
For example, the ProShares Ultra S&P 500 ETF (SSO) and the ProShares UltraPro S&P 500 ETF (UPRO) aim to multiply daily gains of the S&P 500 by factors of 2 and 3, respectively.
An interesting aspect of daily leveraged ETFs is that their net change over a multi-day time period does not generally equal the net change of the underlying index times the leverage factor.
Suppose an index experiences daily gains of +3%, -3%, +3%, -3%. Its net change will have been -0.18%. The net change of a 3x daily ETF based on the index will have been -1.61%, which is much worse than 3 times -0.18%, or -0.54%.
This phenomenon is known as beta slippage or…
