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.
- In blue we have a curve showing the actual ADJ closing prices for UPRO.
- 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.
- 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%
- 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.
- Red uses 2X EFFR as the fee.
- 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.
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