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ProShares UltraPro Dow30 ETF (NYSEARCA:UDOW) is one of the most popular instruments to trade in bullish market conditions. Its daily 3X leverage factor on the Dow Jones is a source of drift, which may be positive or negative. 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 exchange-traded funds (“ETFs”), and shows historical data on UDOW.
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. To understand what is beta-slippage, imagine a very volatile asset that goes up 25% one day and down 20% the day after. A perfect double leveraged ETF goes up 50%…