Blessing or curse? Institutional investment in leveraged ETFs

Investor attention and the use of leverage

“…This analysis synthesizes two research streams on leverage usage. It is related to the recent studies of D 'Hondt et al (2021) and DeVault et al (2021) who show that investor exposure to leveraged exchange-traded products is associated with poor investment performance. It is also related to Barber et al (2020) who examine whether investment performance is different for those who use margin and those who do not use it.…”

“…DeVault et al. (2021) show evidence that institutional holdings of leveraged ETFs predict a weak future performance of institutional investors, which according to the authors can be related to managerial hubris and lack of management skill. Thus, besides the documented tracking errors and poor returns of securities with high embedded leverage (Charupat & Miu, 2011; Frazzini & Pedersen, 2022), the empirical evidence on the use of leveraged products suggests that investors trading leveraged products underperform due to poor trading outcomes.…”

“…(2021) and DeVault et al. (2021) who show that investor exposure to leveraged exchange‐traded products is associated with poor investment performance. It is also related to Barber et al.…”

Lever up! An analysis of options trading in leveraged ETFs

“…Second, and more importantly, the ETF market offers both nonleveraged and leveraged ETFs, the latter of which deliver multiples of returns (e.g., 2, 3 X , or −2 X ) of the underlying, nonleveraged (i.e., 1 X ) ETFs through the use of financial instruments, such as return swaps and futures contracts. The leveraged ETF market enables investors to attain greater market exposure compared with traditional ETFs (DeVault et al, 2021). However, leveraged ETFs also carry heightened risk, making them only suited for sophisticated investors.…”