Shorting Leveraged ETF Pairs

Hessel, Christopher; Nam, Jouahn; Wang, Jun; Xing, Cunyu; Zhang, Ge

doi:10.3905/jot.2018.13.2.069

Cited by 2 publications

(2 citation statements)

References 14 publications

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“…Another strand of research (Hessel et al 2018) has explored the strategy of concurrent shorting of an inverse ETF and a leveraged ETF with the same underlying index. These authors applied this strategy to six markets and they concluded that the direction of the movements of the underlying index, that is either upward or downward moves, is not decisive for profitability.…”

Section: Literature Reviewmentioning

confidence: 99%

Two Investment Options for Bearish ETF Investors: Inverse ETF and Shorting ETF

Chovancová

Dorocáková

Linnertová

2019

IJFS

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A high liquidity, low expense ratio and the possibility to conduct arbitrage allow exchange-traded funds (ETFs) to be used for short sales. Bearish investors can also buy inverse ETFs. This paper aims to outline two investment approaches for bearish ETF investors and the differences between these two approaches; it also aims to examine the relationship between price and an indicator of volume and evaluate the final positions in selected ETFs in selected periods. Short ETFs dominate in simplicity, flexibility, paying out dividends and especially in the limited size of the loss. On the other hand, their structure, which demands daily rebalancing, causes substantial deviation from the benchmark in the long-term and leads to a higher expense ratio, and lower liquidity increases bid-ask spreads. Negative aspects of ETF short selling lie in unlimited loss, high borrowing costs, the need for margin accounts, variability of loan fees and the possibility of a transaction recall by the lender. On the contrary, margin operations enable potentially higher appreciation of capital by generating rebate rates. Our results show that with the decrease in value of the most used ETFs, short interest is growing for those funds where there is a very strong negative correlation implying hedging tendencies. Short selling proved to be a more advantageous strategy in the observed period of market downturn, as well as in 2011–2017, due to negative returns, however, by applying margin trading inverse ETFs turned out to make less losses. Sector-oriented inverse ETFs are the exception, where the largest differences between these two strategies are recorded. However, the final conclusion of the suitability of one of the analyzed strategies depends on the market volatility and the direction of the market itself.

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Section: Literature Reviewmentioning

confidence: 99%

Two Investment Options for Bearish ETF Investors: Inverse ETF and Shorting ETF

Chovancová

Dorocáková

Linnertová

2019

IJFS

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“…The Sharpe ratio is maximized when shorting the -3x fund and the +3x fund in a 2:1 and not in a 1:1 ratio. Hessel et al, (2018) show that when shorting LETF pairs, the expected return of this strategy is high when the weighted sum of various orders of autocorrelations is negative and the volatility of the benchmark index is high. They empirically examine triple leveraged ETF pairs following six indexes and find that in four of the six markets the shorting pair strategy can produce average monthly returns of more than 1%.…”

Section: Main Ideamentioning

confidence: 95%

Exchange traded funds in Europe and the US

Τσαλίκης¹

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Τα Διαπραγματεύσιμα Αμοιβαία Κεφάλαια είναι από τα πιο επιτυχημένα και καινοτόμα χρηματοοικονομικά προϊόντα των δύο τελευταίων δεκαετιών. Έχουν γίνει εξαιρετικά δημοφιλείς τόσο από ιδιώτες όσο και από θεσμικούς επενδυτές λόγω της απλότητας, των χαμηλού κόστους διαφοροποίησης και της εύκολης προσβασιμότητας σε διάφορες κατηγορίες περιουσιακών στοιχείων. Αυτή η διατριβή στοχεύει στην αύξηση της κατανόησης του τρόπου λειτουργίας των ETF και στην εξέταση εάν αποτελούν ασφαλές επενδυτικό μέσο για τους επενδυτές. Αν και τα πρώτα ETF ήταν σχετικά απλά και εύκολα κατανοητά, οι πρόσφατες καινοτομίες, oπως τα μοχλευμένα ETF, είναι πιο περίπλοκες και απαιτούν υψηλότερα επίπεδα εξειδίκευσης. Αυτές οι εξελίξεις δημιούργησαν νέες ευκαιρίες και προκλήσεις για επενδυτές και ρυθμιστικές αρχές. Ένας άλλος στόχος αυτής της διατριβής είναι να αξιολογηθεί η δομή των μοχλευμένων ETF και τα ιδιαίτερα χαρακτηριστικά τους μιας και η δυναμική των τιμών τους εξαρτώνται από τη διαδρομή του δείκτη που ακολουθούν.

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Shorting Leveraged ETF Pairs

Cited by 2 publications

References 14 publications

Two Investment Options for Bearish ETF Investors: Inverse ETF and Shorting ETF

Two Investment Options for Bearish ETF Investors: Inverse ETF and Shorting ETF

Exchange traded funds in Europe and the US

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