UPRO - TQQQ: Leveraged ETF Decay - July 2024 Update

2024-07-24 08:27:08 ET

Summary

• Analyzing hidden costs of investing in leveraged ETFs through mathematical basis.
• Comparison of theoretical frictionless leveraged ETF returns with actual returns to identify embedded costs.
• Observations on decay in leveraged ETFs, impact of rebalancing, and potential arbitrage opportunities.
• Analyzing common mistakes in calculating LETF decay on the simplistic 2X and 3X basis without mathematically isolating the effects of daily compounding and daily costs or re-balancing.

During lockdown, I wrote several articles for Seeking Alpha to analyze the hidden costs of investing in leveraged ETFs, specifically focusing on 'The Pricing of Leveraged ETF Decay.' These articles aimed to research and test the correct mathematical basis for deriving frictionless leveraged ETF returns. By establishing the correct basis for deriving theoretical frictionless leveraged ETF returns, we can then compare these with actual returns to identify the embedded costs in various leveraged ETFs.

The following charts in this article build on the (somewhat different) leveraged ETF decay pricing methodology that I have tried to explain in my previous articles (see here and here and here ). Please note that I am not expressing any views whatsoever on the likely price movements or weightings in the underlying indices (including SPY, VOO, QQQ, VB, and semiconductor indices). I am specifically only looking at the investment decision relating to the holding costs of LETFs relative to other lower-cost LETF and un-leveraged ETF alternatives that can provide an equivalent market exposure....

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