Strategies · Library · ETFs
§4.5Hedges and structures
Leveraged ETFs (LETFs)
Leveraged and inverse-leveraged ETFs reset daily, which tends to wear down their value over time in choppy markets. The trade shorts both a bull and a bear fund on the same index and parks the cash in Treasuries.
- Asset class
- ETFs
- Held for
- Months
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Pairing of a 2x or 3x long fund with the matching inverse fund on one index
- Entry and exit
- Hold the pair short plus a Treasury ETF; rebalance to keep the legs equal.
- Sizing
- Equal dollar short in each leveraged fund, rest in Treasuries
How it fails
- Large loss if one leg jumps
- Borrow costs
- Short selling unsupported
Data it needs
- daily adjusted closes
- additional inputs ARCANE lacks
Prices for leveraged ETFs and Treasury ETFs are available; shorting is not.
How ARCANE uses it
Not drafted; can inform an explanatory note on why leveraged ETFs decay (paper only).
The core trade is shorting, which the language cannot express.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §4.5, p. 65 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.