The golden target: analyzing the tracking performance of leveraged gold ETFs

Abstract

This paper studies the empirical tracking performance of leveraged ETFs on gold, and their price relationships with gold spot and futures. For tracking the gold spot, we find that our optimized portfolios with short-term gold futures are highly effective in replicating prices. The market-traded gold ETF (GLD) also exhibits a similar tracking performance. However, we show that leveraged gold ETFs tend to underperform their corresponding leveraged benchmark. Moreover, the underperformance worsens over a longer holding period. In contrast, we illustrate that a dynamic portfolio of gold futures tracks significantly better than various static portfolios. The dynamic portfolio also consistently outperforms the respective market-traded LETFs for different leverage ratios over multiple years.

Leveraged Etf Implied Volatilities From Etf Dynamics

“…The question of consistent pricing, as we have investigated for equity LETF options in terms implied volatility, is also relevant to LETF options in other sectors. Naturally, the valuation of LETF options will depend on the dynamics of the LETFs and underlying price process, which may vary significantly across sectors (see, e.g., Guo and Leung ; Leung and Ward for commodity LETFs). Nevertheless, it is both practically and mathematically interesting to adapt the techniques in the current paper to investigate the implied volatilities across leverage ratios with different underlyings.…”

Do Market Conditions Affect the Tracking Efficiency of Exchange-traded Funds? Evidence from Developed and Emerging Markets

“…They found that the tracking errors associated with both forms of passive investment in South Africa were similar to those estimates obtained in international research for European, Australian and other emerging markets, based on the majority of the tracking error methods employed, but they were not as efficient as the US markets. Leung and Ward (2015) studied the tracking performance of leveraged ETFs on gold, and their price relationships with gold spot and futures, finding that leveraged gold ETFs tended to underperform their corresponding benchmark, becoming worse over a longer holding period.…”

Constructing cointegrated cryptocurrency portfolios for statistical arbitrage

“…Mean-reversion trading strategies have been extensively researched and studied by academic researchers and practitioners who seek to understand the long-term co-movements of different asset prices and arbitrage from the mean-reverting property of the price spread. Strategies have been developed for many areas of traditional finance, including fixed income Wagner (2005), commodities and futures (Leung and Ward, 2015), as well as equities and ETFs (Kang and Leung, 2017; Leung and Li, 2015). However, very little research has been done for trading pairs or baskets of cryptocurrencies.…”