Is there evidence that in the long-term, leveraged ETFs perform poorly?

Question

I came across an interesting question: "Why are daily rebalanced inverse/leveraged ETFs bad for long term investing?"

Despite the topic, the answers there actually illustrated the hypothetical risk of short-term trading in leveraged ETFs (i.e. in days), closing the subject with the assumption that, if the demonstrably extremely risky short term trading continued into the future, the value of the ETF would get inevitably get eliminated.

Trying to learn more about the subject, I was surprised that these leveraged ETFs actually appear to have a strong long-term track record.

For example, one of the oldest leveraged ETFs, 2XTechnology ETF ROM was launched in February 2007, just 10 months before the Great Recession. To date, it has more than doubled the performance of Technology ETF VGT during the same period, despite having being launched just before the Great Recession: 649.54% to 317.25%. (Many other leveraged ETFs have performed much better, but they were launched after or towards the end of the Great Recession, so I didn't use them as an example.) Even in this extremely unfavorable example where people bought the leveraged ETF just before the worst recent disaster hit, the leveraged ETF eventually beat the non-leveraged ETF in the same sector by a considerable margin.

The data I found is that these investments are extremely volatile and can kill you in the short term, but in the long term they are very profitable. (I think this volatility can be easily mitigated by keeping only a small portion in leveraged ETFs, but that's another subject). This is exactly opposite to the premise that these investments can be very rewarding in the short term but in the long term they inevitably fail.

Is there actual evidence that leveraged ETFs perform poorly in the long-term?

Lawrence · Answer

I think you're on to something. We all hear they they're only for short-term trading, but my experience says otherwise. The issue I've seen is that over time a 2x etf will not always double the underlying etf. Over time, the costs eat away at that return, which is understandable. But at least in a favorable market, they still outperform. Clearly, that leverage cuts both ways, so the corrections hurt. I figured my 2x bull ETF did about 1.5 over the years I held it.

Answered by Lawrence on October 11, 2020

Eric · Answer

One of the big reasons is that they decay during volatile periods.  For example, compare the performance of VOO and UPRO since the beginning of 2020.  UPRO reached a peak value of about $79 before the big drop. Currently it is back to about $56. VOO by comparison was up to about $310 before the drop and is now back up to about $308.
If you look back over a long enough period, most leveraged ETFs not tied to some generally increasing index will show even more severe decay than this. DUST is a good example. 2020 is the first big instance of this decay for leveraged ETFs tracking broad market indexes in the last 10 years.

Is there evidence that in the long-term, leveraged ETFs perform poorly?

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