I just had a quick look at the daily returns for a few pairs of leveraged ETFs - it appears that the percent daily returns do not match perfectly. For instance, looking at FAS/FAZ, the returns for the two can diverge as much as 15 bps per day.
Reading the summary, the language appears very clear:
FAZ:The investment seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Russell 1000Â® Financial Services Index.
FAS:The investment seeks daily investment results, before fees and expenses, of 300% of the performance of the Russell 1000Â® Financial Services Index.
Seems to me that the process has to be fairly simple - every day, managers of these ETFs submit MOC orders that will make the notional exposure to the underlying index is equal to the leverage.
- I am missing something in understanding how these products function like mandate does not have to followed exactly and the manager uses his discretion in matching the returns (e.g. he does not need to match the close to close returns)?
- Is the divergence is daily returns driven by the managers inability to execute order directly at MOC or some sort of expences (e.g. comissions/borrow/fees or maybe execution mismatches) are passed into the ETF price?
- I am understanding the concept of "300% of the performance" incorrectly (I assume that means R(ETF) = R(Index) * Leverage, so R(ETF 3x) == -R(ETF -3x) by definition? I assume that under performance they mean percentage return of the index.
- It's a problem with the data - I used Yahoo data for this little study. Can I assume that the closes should be correct (I know opens, high/lows are sometimes not).
PS. I do know that the re-balancing process creates negative exposure to the variance (by virtue of buying on the up days and selling at the close of the down days) but the daily percentage returns should not be affected, at least that's how I understand the replication process.