Can Selling Leverage Exchange Traded Fund Pairs Short Be A Profitable Trade?

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Can Selling Leverage Exchange Traded Fund Pairs Short Be A Profitable Trade? – Journal of investment strategies




George Tsalikis and Simeon Papadopoulos


  • Investors who sell LETF pairs are negatively affected by the cumulative squared return of the underlying index and positively affected by holding periods and index variance.
  • After factoring in the costs of short selling, the profitability of short selling LETF pairs was greatly diminished.
  • Bear short funds produced average earnings and slightly higher risk-adjusted returns than bull funds, even after factoring in short selling fees.

In this article, we examine whether investors can profit from the underperformance of leveraged exchange traded funds (ETFs) over long holding periods. One strategy is to short sell equal amounts of positive and negative leveraged ETFs that track the same benchmark in order to achieve lower volatility as profit. The profitability of this strategy is independent of the direction of the underlying index. A theoretical framework is presented regarding the conditions under which this strategy can be profitable. When empirically tested for two years in four S&P 500 leveraged ETFs for monthly holding periods, this strategy yielded a profit for both ˙2 and ˙3 pairs. However, after considering the short selling fees for the funds, the profitability of this strategy for both pairs was greatly diminished. We also look at a different method of going long in an index by selling bearish funds and compare it to buying bullish funds for the same time period. Empirically tested for two years in four leveraged funds of the S&P 500 for monthly holding periods, short selling bearish funds produced average profits and risk-adjusted returns slightly above that of a long position in bullish funds, even after factoring in short selling fees.


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