Leveraged ETF Premium

Leveraged exchange-traded funds (LETFs) that allow investors to over-proportionally participate in abstract markets, such as indices, are studied in this paper. LETFs are found to suffer from a performance lag (negative alpha). The lag is categorized in three ways: fund management fees, compounding effects, and a leverage premium. The leverage premium effect intensified during the recent financial crisis (2008/09). In accordance with the approach put forward by Frazzini and Pedersen [2011], various market neutral long/short trading strategies which are sought to exploit the LETF premium are found to have delivered positive abnormal returns over the past years. While these strategies are not necessarily replicable, they teach us a lot about the relation between risk and expected return of LETFs in general