An Alternative Method to Construct Levered Indexes

Abstract

Investment products that seek to provide leveraged and inverse exposure to the equity markets have enjoyed great success in attracting assets. The largest and most popular exchange traded funds (ETFs) that provide these exposures rebalance their positions each day in an attempt to provide a precise multiple of the market return for the subsequent day. However, the daily rebalancing process can be detrimental to returns over holding periods longer than one day. For investors looking for leveraged or inverse exposure for holding periods greater than one day, a less frequent rebalancing cycle may be more appropriate. Further, moving away from a straight market-capitalization-based weighting methodology may offer opportunities to enhance the return profile thereby enabling an investor to better achieve her long-run investment objectives.

TOPICS: Exchange-traded funds and applications, portfolio construction, style investing