Please, can you tell me why leveraged ETFs underperform their underlying index in a mean reversion environement? i can see this intuitively nor by formulas.
HI may i help,( my point of view may be i am wrong but as much i know but be dont take for granted everything but help you to understand)
The ETFs are a set of exchange traded funds of securities and most of them are not liquid. The mean reversion period profitability can be performed by taking ETF positions and transaction cost of liquidity for these set of securities of ETF is high. The index can be traded using futures and these are highly liquid comparatively thus they can take the profitable opportunity in a mean reversion environment and exploit them hassle free with minimal trading cost due to their high liquidity. The profitable opportunity needs to be executed within minutes so that it is quit expensive to trade ETFs to exploit such opportunities whereas its very much easily executed with index futures. So i think in index futures are better placed than leveraged ETF to exploit the mean reversion strategy.
In the mean time the attractive price to trade might shift in unfavorable position and due to illiquid nature of ETFs whereas these risk of price movement while executing at favorable price is less in case of index futures. Thus overall the ETF can be executed at unfavorable prices as compared to trading index futures directly at attractive price.
Seeing above two factors its obvious to see why levegraged ETFs can be less attractive as compared to the underlying index.
thanks
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