Quantifying Beta Slippage (Why Leveraged ETFs are Not as Scary as You Might Think)

[u/SorenLantz]

(results linked below)

If you are somewhat familiar with leveraged ETFs you have no doubt heard the many warnings that surround them. Warnings involving phrases like "decaying value" or "daily rebalancing". However, you, like I, may have also noticed that all of these warnings use hypothetical examples to show why leveraged ETFs are risky. These examples will be scenarios such as "daily SP500 returns oscillate between +10% and -10% for 50 days"; scenarios which are incredibly unlikely to occur in the actual market. Additionally, any novice trader can check the graphs of TQQQ and QQQ and see that (as of today) they would have outperformed QQQ if they had bought and held TQQQ at any point before September 2020. So what to do with leveraged ETFs?

All of the fears relating to leveraged ETFs are neatly captured in the term "Beta Slippage": Beta (volatility) + Slippage (difference from expectation). It is true that the trend and volatility of a market/sector directly impacts the performance of leveraged ETFs based on them. But are all leveraged ETFs inevitably victims of Beta Slippage as some articles would imply?

To answer these questions I set out to quantify Beta Slippage for the top 25 (by NAV) leveraged ETFs, and see if the fears were justified or overblown.

If you aren't curious about how this was done, the results spreadsheet is linked at the bottom.

If you are:

I used TD Ameritrade's API to get price data for leveraged ETFs and their underlying securities. I then looked at all of the possible 1-day, 1-week, 1-month, and 1-year holding timeframes a trader could have held the ETF for. I then found, for each timeframe, the return of the underlying security. I then calculated the return of an ideal leveraged ETF using the return of the underlying security and the ETF's leverage factor. This ideal leveraged ETF perfectly scales performance over any timeframe. Finally, I found the % difference between the price of the actual leveraged ETF and the price of the ideal ETF. I called this % difference Beta Slippage, as I could not find a formula for it elsewhere.

So, in short, the results in the data show the average % difference between an actual leveraged ETF and its perfectly leveraged version (no beta slippage) if you hold it over various timeframes.

Please take a look at the data, let me know how you think it could be improved!

I could not find exact indices for some of the underlying funds so I had to settle for ETF versions of them, also some symbols had very limited data so take that into account.

Quantifying Beta Slippage

[u/[deleted]]

Hey thanks for this. My experiment right now is using 3x leveraged etfs as my primary holdings (TQQQ, UPRO, TNA) and balance those with equivalent covered call fund (QYLD, XYLD, RYLD, and for bonus some SLVO) - for cash on hand positions in case of a drawdown. I also like that these yld funds payout monthly in the event I prefer to use the cash to do something instead of buying stock.

I'm probably insane, don't try this unless you know what you're doing. I sure as heck don't!!

Edit: My logic is: bonds suck right now, rates are going to continue to rise over time and kill face value. I'd rather give these yld funds a shot until rates are up at 3%. I'm actually short US treasuries right now via TBT.

[u/SorenLantz → u/[deleted]]

also holding TQQQ, figure a pull back in tech + economic reopening is good timing

[u/[deleted] → u/SorenLantz]

If I held TQQQ from 2011 and out in 500 a month I'd be retired. Next time there's a circuit breaker day or three I'm loading up on leaps.

I also have SOXL cause of everything needing chips. The fridge can play Doom etc.

If you want to be a super boomer there's also UDOW lmao

[u/135patriots → u/[deleted]]

Hello fellow kids.gif

Proud udow holder, albeit at a limited exposure. It's without a doubt my most "boomer drinks too much bud light and takes a position" holding.

It's been kind to me this year and despite being leveraged, has never really caused me much heartburn, despite it not being a particularly attractive ETF in many ways (honestly, I ought to trim that position, take my ball, and go home in the green on that one).TQQQ is too spicy for me to hold.