Empirical Insights on the Trading Behavior of the UK Leveraged ETFs

Gerasimos G. Rompotis


Objective. This paper focuses on UK leveraged Exchange Traded Funds (ETFs) and examines their ability to meet their daily targets, the impact of volatility on targets’ achievement, and their pricing efficiency.

Methodology. Standard regression analysis is used to evaluate performance, tracking efficiency and persistence in tracking failures, and the relationship between tracking efficiency and market volatility. Moreover, the pricing efficiency is examined along with the persistence in premium and the influence of market factors on premium.

Findings. Results reveal that ETFs achieve their targets but occasionally tracking error can be significant. Furthermore, increases in market volatility relate to higher and lower tracking errors for bull and bear ETFs respectively. Moreover, average premiums testify a sufficient fit between trading prices and net asset values whereas the premiums are eliminated sharply. Moreover, the pricing efficiency of bear ETFs is positively associated with benchmark returns. The opposite is the case for bull ETFs. Finally, the pricing deviations are positively related to benchmarks’ volatility.

Limitations. A possible limitation is that our sample includes just nine bear and sixteen bull ETFs even though more than 90 leveraged ETFs are traded on the UK market and our results may not be indicative of the entire UK leveraged ETF market. However, we had to use a small sample of ETFs because the trading activity of the rest ETFs has been very poor and, consequently, our analysis could have been biased by a thin trading effect.             

Originality/Value. This is the first study to examine the UK market of leveraged ETFs.


Leveraged ETFs, daily performance, tracking error, volatility, premium

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DOI: https://doi.org/10.15194/jofi_2015.v1.i3.32


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