Hongfei Tang and Xiaoqing Eleanor Xu

“Tracking Performance of Leveraged Energy Exchange-traded Funds,” by Hongfei Tang and Xiaoqing Eleanor Xu, 2016, Journal of Derivatives, Spring 2016, Volume 23, Issue 3, pp. 37-60.

Link: http://www.iijournals.com/doi/abs/10.3905/jod.2016.23.3.037


With increasing demand for hedging, investing, and diversification, leveraged energy exchange-traded funds (LEETFs) provide producers, consumers, investors, and portfolio managers with liquid and flexible tools to gain leveraged and/or inverse exposure to the energy sector, especially crude oil. For both stock-based and futures-based LEETFs, this article examines their tracking performance and the fundamental determinants of their return deviations due to compounding effects, fund management issues, and market inefficiency. Investors in stock-based LEETFs should be aware that the underlying energy stock index may not well represent the energy commodity, and the cumulative NAV return deviation due to the swap-related interest payout/receipt and expense ratio. Investors in futures-based LEETFs should be aware of the impact of the futures term structure and the choice of the futures contract on the LEETFs’ return deviations due to the need to roll over futures contracts to deliver the intended leverage exposure to the energy commodity. In addition, all LEETF investors should be mindful of the potentially large negative compounding return deviations due to the daily rebalancing nature of these funds and the high volatility of the energy sector.

Keywords: Leveraged Energy ETFs; Commodity Futures; Return Deviation; Compounding Effect; Tracking Error


Do you Zotero?

Today I learned about the wonderful, easy & powerful the FREE Zotero citation management software.  If you don’t know what Zotero is, click on this link to register for a workshop:  TLTC Zotero citation management.   (If you can’t make this scheduled session, let me–Elizabeth McCrea–know and I will try to arrange another session shortly.)

It takes only about a half hour to learn, a day or two to get comfortable with, and saves you untold time, energy and frustration from then on.