Leveraged ETFs are one of the natural decay. Holding a position of ETF is commonly worse than holding an N-times leveraged position in the underlying asset. But few people are understanding the reason, which is called beta-slippage. Leveraged ETFs often underperform their underlying indexes leveraged by the same factor. This relative decay has several reasons such as beta-slippage, roll yield, tracking errors, management fees. Roll yield may be prominent for commodity ETFs, but beta-slippage is usually the main source of decay. When an asset is trending with little volatility, a leveraged ETF can be bringing an excess return over the leveraged asset. If you want to know other stock news like Nyse s, you can check at https://www.webull.com/quote/nyse-s .
The Best And Worst Drifts
- The inverse leveraged gold miners ETF (NYSE Arca DUST) has the worst monthly decay with a drift of -4.23% normalized to 1x the underlying index exposure.
- The highest positive monthly drift is in the leveraged volatility ETN (TVIX), with a drift of +81.57% normalized to 1x the index exposure.
- However, DUST stock or DUST stock news TVIX is showing the worst decay in 1 year with a normalized drift of -26.05%.
- The highest positive drift in 1 year is for the inverse leveraged ETF in energy (ERY) with a normalized drift of almost +42.39%.
SPXU historical and current drift: a warning signal
- The 12-month trade drifts of the long and inverse leveraged ETFs in stock indexes became all negative this month. SPXU has a positive drift on long periods, as reported. The average 1-year normalized drift of SPXU.
- SPXU may be a cheap instrument for hedging a portfolio in a bull market compared with other derivatives. It may suffer a significant decay as long as market daily returns stay volatile.
- Hedging with SPXU has worked very well in the first week of the 2020 black swan has gained 39.98%, significantly more than SPY return on the same period (-11.16%) multiplied by the leveraging ratio (-3).
- SPXU did a great job when the black swan started, but investors using SPXU as a hedge should be cautious from now high volatility. It may become the new normal in the next few months.
- The real drift of a hedging position depends on its rebalancing dates. Rebalancing may offset a part of the decay in a volatile market. However, the process is path-dependent and may not work the same way in the future as in the past. In doubt, it is better to use hedging instruments with less or no leverage in a volatile environment. For more stock news like Nyse ddd, you can visit https://www.webull.com/quote/nyse-ddd.