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Pay For Performance: Do Higher Expense Ratios Of Levered And Inverse Etfs Lead To Lower Tracking Error?, Grant Carrier
Pay For Performance: Do Higher Expense Ratios Of Levered And Inverse Etfs Lead To Lower Tracking Error?, Grant Carrier
Honors College
Levered and inverse Exchange Traded Funds (LETFs) are a recent and controversial innovation in financial engineering. These ETFs set out to achieve daily returns that are a multiple (2x, 3x) or negative multiple (-1x, -2x, -3x) of an underlying index. Since their inception in 2006, research has overwhelmingly concluded that these ETFs fail to meet their stated objectives over long holding periods. However, there has been debate over the causes of this error, and the holding period at which the tracking begins to break down.
This thesis sets out to analyze the relationship between the expense ratios of LETFs and …