Dodging the Leveraged ETF Bullet - An Innovative Trading Strategy

Sammanfattning: Two main parts, with separate purposes constitute this thesis. Firstly, ETFs and Leveraged ETFs are demystified in an indepth descriptive manor. In a short period of time ETFs have reached immense popularity, but investor knowledge and sophistication is lagging. We attempt to fill that gap of knowledge in order to help investors make better informed investment decisions. Secondly, leveraged ETFs are known for their long-term under performance and tracking error. However, unsophisticated investors, might misunderstand the nature of leveraged ETF returns hoping to gain leveraged returns over time, ending up dissapointed and perplexed. Therefore we have invented and constructed a trading strategy that provides the same leveraged exposures to markets as leveraged ETF but is suitable for buy-and-hold investing. Hence, dodging the value trap of leveraged ETF under performance and providing investors with an alternative. Our subject of study has been the ProShares UltraLong ETF SSO, providing two times the return of the S&P500 Index on a daily basis. By constructing a portfolio consisting of unleveraged ETFs, SPDR S&P500 SPY, tracking the same and gaining leverage on a portfolio level by borrowing funds, we will show both over performance realtive to the SSO and a far better market tracking leveraged position. The study is essentially a back test of our portfolio between 2006-06-22 and 2010-04-29.