Leveraged Exchange-Traded Funds: Their Pricing and Tracking Ability

In this paper, we examine the pricing efficiency and the tracking ability of leveraged exchange-traded funds (LETFs), which are a recent and very successful financial product. The goal of these funds is to generate daily returns that are in a positive or a negative multiple of the daily returns on an underlying benchmark. With respect to their pricing, we find that price deviations (from NAVs) are, on average, small even though large deviations …