Leveraged ETFs and Financing Costs

I have been having this discussion about how much rising interest rates will change the ability of leveraged ETFs to track their target benchmarks etc. Below is a chart summarizing some of the results.

1. In blue we have a curve showing the actual ADJ closing prices for UPRO.
2. Green shows starting with the closing price of UPRO on the first day. Then follows the growth of the SPY ADJ close returns for each day multiplied by 3 with no additional costs subtracted.
3. Orange shows the same as green but includes a consistent fee that was needed for the period to have the orange curve end with the same ending price as UPRO ADJ actual. The annual fee needed was 2.46033450515858%
4. Black uses the same format but instead of the fee needed to match it uses 2 x the cost implied for leverage using futures prices and the current S&P 500 dividend.
5. Red uses 2X EFFR as the fee.
6. The interest rates and dividend rate of S&P 500 are also graphed for reference.

So far it seems as though for my purposes neither method shows a large difference in results except over long period of course. However, for the sake of backtesting during the ultra high interest rates the Fed reached in the 70s/80s a method such as the EFFR could be useful since the futures data doesn’t go back as far.

You can see the data I used here.

See my Brokerage Accounts

In addition to this blog you can follow my live brokerage accounts anytime. The three links below will take you to a third-party website called collective2 where I record and publish my personal trading decisions. If you have questions let me know!

Retirement Account #1:Patience is a Virtue

Retirement Account #2: My Roth IRA

Paper Trading Account #3: Leverage and Patience

Disclaimer

This is not investment advice. This website is designed to talk about investments but it is not designed to give you personalized investment advice. This site is generic and should not be used as the basis for any investment decisions. This is for entertainment and educational purposes only.

The owner of PatienceToInvest.com is also a trade leader on Collective2.com. We may receive compensation by promoting some collective2 strategies over others.

Investing is risky and can result in the loss of all your capital and even more than your original capital in some cases.