The True Cost of Leveraged ETFs
Under some circumstances, altruists might prefer to leverage their investments. The easiest way to get leverage is to buy leveraged ETFs. But leveraged ETFs charge high fees and incur other hidden costs. These costs vary substantially across different funds and across time, but on average, leveraged ETFs have historically had annual excess costs of about 2%, or around 1.5% on top of the expense ratio.
Given reasonable expectations for future returns, leveraged ETFs most likely have substantially higher arithmetic mean returns than their un-leveraged benchmarks. They also appear to have higher geometric mean returns than their benchmarks, but only by a small margin. Slightly more pessimistic estimates would find that adding leverage decreases geometric return.
Note: Many investors can get leverage more cheaply via other methods, such as margin loans or futures. Even if leveraged ETFs appear better than un-leveraged investments, other forms of leverage might be better still.
Disclaimer: I am not an investment advisor and this should not be taken as investment advice. This content is for informational purposes only. Please do your own research or seek professional advice and otherwise take reasonable precautions before making any significant investment decisions. Past performance is not a guarantee of future results. Any given portfolio results are hypothetical and do not represent returns achieved by an actual investor.
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