Long-Term Equity Investing with Leveraged Exchange-Traded Funds

Abstract

Under conditions of upward-trending stock prices in the broad market, bull (long) leveraged exchange-traded funds (LETFs) benchmarked to the S&P 500 Index produce significant rates of return, in excess of their leverage factors and over long periods. A seven-year, eight-month test of upward-trending stock prices found that relative to a return on the S&P 500 of 158.93%, the 3x UPRO, 3x SPXL, and 2x SSO LETFs—all benchmarked to the S&P 500—generated returns of 1,262.24% (about 8 times that of the S&P 500), 1,046.68% (about 6.6 times the S&P 500), and 560.14% (3.5 times the S&P 500), respectively. UPRO, SPXL, and SSO delivered their stated leveraged returns, plus correspondingly significant excess returns of 785.45%, 569.89%, and 242.28%, respectively. The excess returns were attributable to advantageous tracking error. The first period included two major reversals, 9.7% and 13%, along with a number of smaller price dips. A second period, which began with four months of downward-trending stock prices followed by eight years of upward-trending prices, also produced significant rates of return, including excess rates of return well beyond their leverage factors. An even longer third test period also generated positive returns. These results are particularly astonishing, given the dire warnings from academicians, the SEC, and FINRA that using LETFs beyond a single day or very short time periods would lead to value destruction.