@article {Tang37, author = {Hongfei Tang and Xiaoqing Eleanor Xu}, title = {Tracking Performance of Leveraged Energy Exchange-Traded Funds}, volume = {23}, number = {3}, pages = {37--60}, year = {2016}, doi = {10.3905/jod.2016.23.3.037}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The population of exchange-traded funds (ETFs) has exploded in recent years, with ETFs in a vast array of portfolios tied to specific asset classes, industries, active and passive trading strategies, and so on. In some cases, there are multiple leveraged long and short versions based on the same underlying factor. In this article, Tang and Xu examine nine leveraged ETFs tied to oil. Five are based on portfolios of oil stocks, and the other four use commodity futures to track the price of oil itself. Two main questions are: How correlated are the ETFs with the underlying energy risk factors they are designed to hedge? And, do the leveraged versions succeed in producing their target multiples of the exposure to the oil market? The authors find stock-based ETFs are much more correlated with the stock market than with oil prices, whereas the reverse is true of the crude oil ETFs. But all of the ETFs tend to fall short of their intended multiples, especially over longer holding periods, for several reasons. Tang and Xu decompose the shortfall to see how much is due to the product{\textquoteright}s inherent convexity, which causes compounding to produce underperformance; how much comes from discrepancy between the ETF{\textquoteright}s market price and its net asset value; and how much is the result of management{\textquoteright}s inability to hit their target return even on a single day. All three factors are important and only the {\textquotedblleft}inefficiency{\textquotedblright} difference between ETF price and NAV (net asset value) does not cumulate over longer holding periods.TOPICS: Exchange-traded funds and applications, commodities, risk management}, issn = {1074-1240}, URL = {https://jod.pm-research.com/content/23/3/37}, eprint = {https://jod.pm-research.com/content/23/3/37.full.pdf}, journal = {The Journal of Derivatives} }