SPUU Erosion Is Advancing: May Drift Dashboard

seekingalpha05-02

Leveraged ETFs have a path-dependent drift: here is a dashboard with 22 of them.Leveraged ETFs in semiconductors, biotechnology and silver show the largest drifts.The Direxion Daily S&P 500® Bull 2X ...

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However, its daily 2X leverage factor is a source of drift. It must be closely monitored to detect changes in the drift regime. This article explains what \"drift\" means, quantifies it in more than 20 leveraged ETFs, and focuses on SPUU drift history. Why do leveraged ETFs drift?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IVV":"标普500指数ETF","SPXU":"三倍做空标普500ETF","BK4559":"巴菲特持仓","OEF":"标普100指数ETF-iShares","BK4588":"碎股","BK4550":"红杉资本持仓","SDS":"两倍做空标普500ETF","UPRO":"三倍做多标普500ETF","SPY":"标普500ETF","BK4581":"高盛持仓","BK4504":"桥水持仓","LABD":"三倍做空标普生物-Direxion","SOXS":"三倍做空半导体ETF-Direxion Daily","SPUU":"Direxion Daily S&P 500 Bull 2X Shares",".SPX":"S&P 500 Index","LABU":"三倍做多标普生物-Direxion","FDN":"First Trust Dow Jones Internet I","VOO":"Vanguard标普500ETF","SSO":"两倍做多标普500ETF","OEX":"标普100","AGQ":"二倍做多白银ETF(ProShares)","BK4534":"瑞士信贷持仓","BK4585":"ETF&股票定投概念","SH":"标普500反向ETF"},"translate_title":"SPUU侵蚀正在推进：可能漂移仪表板","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AGQ":1,"SPUU":1,"SOXS":1,"LABU":1,"LABD":1,"VOO":0.9,"FDN":0.9,"SPY":0.9,"OEX":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,".SPX":0.6,"SH":0.6,"SDS":0.6,"OEF":0.6,"IVV":0.6,"ESmain":0.6},"content_text":"Leveraged ETFs have a path-dependent drift: here is a dashboard with 22 of them.Leveraged ETFs in semiconductors, biotechnology and silver show the largest drifts.The Direxion Daily S&P 500® Bull 2X Shares ETF has suffered from decay recently, and its drift has deteriorated recently.   kemirada/iStock via Getty Images Direxion Daily S&P 500® Bull 2X Shares ETF (NYSEARCA:SPUU) is an instrument magnifying the broad market performance for trading purposes. However, its daily 2X leverage factor is a source of drift. It must be closely monitored to detect changes in the drift regime. This article explains what \"drift\" means, quantifies it in more than 20 leveraged ETFs, and focuses on SPUU drift history. Why do leveraged ETFs drift? Leveraged ETFs often underperform their underlying index, leveraged by the same factor. The decay has essentially four reasons: beta-slippage, roll yield, tracking errors, management costs. Beta-slippage is the main reason in equity leveraged ETFs. To understand what is beta-slippage, imagine a very volatile asset that goes up 25% one day and down 20% the day after. A perfect double leveraged ETF goes up 50% the first day and down 40% the second day. On the close of the second day, the underlying asset is back to its initial price: (1 + 0.25) x (1 - 0.2) = 1 And the perfect leveraged ETF? (1 + 0.5) x (1 - 0.4) = 0.9 Nothing has changed for the underlying asset, and the ETF price is down 10%. It is not a scam, just the normal behavior of a leveraged and rebalanced portfolio. In a trending market, beta-slippage can be positive. If the underlying index goes up 10% two days in a row, on the second day, it is up 21%: (1 + 0.1) * (1 + 0.1) = 1.21 The perfect 2x leveraged ETF is up 44%: (1 + 0.2) * (1 + 0.2) = 1.44 Beta-slippage is path-dependent. If the underlying index gains 50% on day 1 and loses 33.33% on day 2, it is back to its initial value, like in the first example. However, the 2x ETF loses one third of its value, instead of 10% in the first case: (1 + 1) x (1 - 0.6667) = 0.6667 Without a demonstration, it shows that the higher the volatility, the higher the decay. Hence, its name: \"beta\" is a statistical measure of volatility. However, it is a bit misleading because the decay cannot be calculated from beta. Monthly and yearly drift watch list There is no standard or universal definition of leveraged ETF drift. Mine is based on the difference between the leveraged ETF performance and Ñ times the performance of the underlying index on a given time interval if Ñ is the leveraging factor. Most of the time, this factor defines a daily objective relative to an underlying index. However, some dividend-oriented leveraged products have been defined with a monthly objective, mostly defunct ETNs sponsored by Credit Suisse and UBS: CEFL, BDCL, SDYL, MLPQ, MORL. First, let’s start by defining “Return”: it is the return of a leveraged ETF in a given time interval, including dividends. “IndexReturn” is the return of a non-leveraged ETF on the same underlying asset in the same time interval, including dividends. “Abs” is the absolute value operator. “Drift” is the drift of a leveraged ETF normalized to the underlying index exposure in a time interval. It is calculated as follows: Drift = (Return - (IndexReturn x Ñ))/ Abs(Ñ) “Decay” means negative drift.   Index Ñ Ticker 1-month Return 1-month Drift 1-year Return 1-year Drift   S&P 500 1 SPY -3.86% 0.00% 22.44% 0.00%     2 SPUU -8.26% -0.27% 38.21% -3.34%     -2 SDS 8.97% 0.63% -26.10% 9.39%     3 UPRO -12.52% -0.31% 54.95% -4.12%     -3 SPXU 13.21% 0.54% -39.17% 9.38%   ICE US20+ Tbond 1 TLT -4.68% 0.00% -14.07% 0.00%     3 TMF -14.61% -0.19% -48.92% -2.24%     -3 TMV 16.10% 0.69% 60.93% 6.24%   NASDAQ 100 1 QQQ -4.58% 0.00% 32.51% 0.00%     3 TQQQ -14.86% -0.37% 89.43% -2.70%     -3 SQQQ 14.79% 0.35% -55.88% 13.88%   DJ 30 1 DIA -4.30% 0.00% 13.03% 0.00%     3 UDOW -13.50% -0.20% 23.15% -5.31%     -3 SDOW 14.94% 0.68% -21.17% 5.97%   Russell 2000 1 IWM -5.96% 0.00% 13.35% 0.00%     3 TNA -18.59% -0.24% 14.66% -8.46%     -3 TZA 20.25% 0.79% -34.58% 1.82%   MSCI Emerging 1 EEM -0.39% 0.00% 7.57% 0.00%     3 EDC -2.92% -0.58% 2.31% -6.80%     -3 EDZ 1.83% 0.22% -13.69% 3.01%   Gold spot 1 GLD 1.95% 0.00% 14.65% 0.00%     2 UGL 3.23% -0.34% 19.57% -4.87%     -2 GLL -3.56% 0.17% -16.67% 6.32%   Silver spot 1 SLV 5.21% 0.00% 4.57% 0.00%     2 AGQ 9.03% -0.70% -5.58% -7.36%     -2 ZSL -10.94% -0.26% -13.70% -2.28%   S&P Biotech Select 1 XBI -9.83% 0.00% 5.53% 0.00%     3 LABU -28.95% 0.18% -18.01% -11.53%     -3 LABD 33.60% 1.37% -38.39% -7.27%   PHLX Semicond. 1 SOXX -6.27% 0.00% 57.00% 0.00%     3 SOXL -20.44% -0.54% 169.99% -0.34%     -3 SOXS 17.59% -0.41% -81.20% 29.93%   Click to enlarge The leveraged bull silver ETF (AGQ) shows the worst monthly decay of this list with a drift of -0.70%, whereas the leveraged bull biotechnology ETF (LABU) has suffered the largest 12-month decay: -11.53%. The highest positive drift in one month is +1.37% for the leveraged bear biotechnology ETF (LABD). The leveraged bear semiconductors ETF (SOXS) has the highest 12-month drift: +29.93%, in a large loss. SPUU is in moderate negative drift on both time frames. Positive drift follows a steady trend in the underlying asset, whatever the trend direction and the ETF direction. It means positive drift may come with a gain or a loss for the ETF. Negative drift comes with daily return volatility (“whipsaw”). For example, leveraged ETFs in biotechnology (bull and bear) show a significant 12-month decay because the underlying index has been quite volatile.  SPUU drift history  Since inception on 5/28/2014, SPUU has gained 424% (18.2% annualized), while SPY is at +211% (12.1% annualized) in the same period. The ratio of total returns is close to the daily leveraging factor, which looks great. However, it is misleading: a simulation with synthetic prices starting in January 2000 is much less optimistic: SPUU is at +397% (6.8% annualized) vs. +436% (7.1% annualized) for SPY. Over two market cycles, the leveraged ETF (simulated) has lagged the non-leveraged underlying index. Moreover, its maximum drawdown would have been -89%. The next chart plots the 12-month drift since January 2000 using synthetic prices based on the underlying index. The historical average is -1.94%, which is a bit better than -2.14% for the 3x bull ETF UPRO, plotted on the second chart.   12-month drift of SPUU, simulated with synthetic prices before inception (chart: author; data: Portfolio123)  12-month drift of UPRO, simulated with synthetic prices before inception (chart: author; data: Portfolio123) The difference looks insignificant, but UPRO simulation reports a return of only 155% on this 23-year period (3.9% annualized). Takeaway  Direxion Daily S&P 500® Bull 2X Shares ETF is an efficient swing trading instrument in a bull market. However, it suffers a significant value erosion when the S&P 500 oscillates between positive and negative daily returns. Implied volatility (quantified by the VIX index) is not directly related to decay, but it may be a warning. The 12-month drift of SPUU has been continuously negative since January 2022, despite the 2023 market rally. The drift was approaching zero in March, but it fell back lower in April. Even if SPUU is less risky than UPRO or SPXL, it has been designed for seasoned investors with a good understanding of its behavior behind the advertised leveraging factor.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432517766"}