The ProShares UltraPro Short S&P 500 ETF (SPXU) is one of the most popular instruments to short the broad market for trading or hedging purposes. However, its daily -3X leverage factor is a source of drift. It must be closely monitored to detect changes in the drift regime. This article explains what “drift” means, quantifies it in more than 20 leveraged ETFs, shows historical data on SPXU, and, finally, concludes about the current market conditions. The analysis is also valid for Direxion Daily S&P 500 Bear 3X Shares (SPXS), which tracks the same index with the same factor and has almost identical behavior.
Why do leveraged ETFs drift?
Leveraged ETFs often underperform their underlying index leveraged by the same factor. The decay has essentially four reasons: beta-slippage, roll yield, tracking errors, management costs. Beta-slippage is the main reason in equity leveraged ETFs. However, when an asset is in a