William J. Trainor

Performance measurement of high yield bond mutual funds

Purpose – The high yield debt market has evolved into a

Solving the Leveraged ETF Compounding Problem

1 trillion market over the last 25 years. The purpose of this paper is to analyze the risk‐adjusted performance of individual mutual funds that investors use to invest in this asset class.Design/methodology/approach – Conditional excess returns are calculated for individual high yield bond mutual funds. Performance persistence over time is measured and size, asset growth, asset duration, the expense ratio, turnover, and manager tenure are used to determine if differences across funds can be explained.Findings – Overall, high yield bond funds significantly underperform the CSFB high yield index by 1.6 percent on an annualized basis which is 0.5 percent more than the average expense ratio. Individually, funds do exhibit performance persistence and top ranked funds in one period outperform bottom ranked funds over the proceeding period by an average of 2.7 percent annually. However, except for the expense ratio, commonly used explanatory variables do n...

Leveraged ETF option strategies

It is well established that holding leveraged exchange-traded funds (ETFs) over an extended period of time generally results in returns substantially less than the daily multiple might imply. This is due to the compounding problem caused by the volatility of returns. However, in periods of low volatility, the compounding issue can actually work for investors. The trick is avoiding leveraged funds during periods of high volatility. Using the CBOE Volatility Index (VIX) as a forecasting tool for expected future volatility, this study shows that in the past 20 years, judiciously investing in bullish leveraged ETFs over longer time frames can actually lead to magnified returns greater than the daily leverage implies and increases, the return–risk trade-off as measured by standard Sharpe ratios.

Portfolio Insurance Using Leveraged ETFs

Purpose - – Leveraged exchange traded funds (ETFs) have become increasingly popular since their introduction in 2006. In recent years, options on leveraged ETFs have been promoted as a means of enhancing returns and reducing risk. The purpose of this paper is to examine the interchangeability of S & - P 500 ETF options with leveraged S & - P 500 ETF options and to what extent these options allow investors to manage their risk exposure. Design/methodology/approach - – With increasing liquidity for these fund’s options, simple option strategies such as covered calls and protective puts can be implemented. This study derives call-call and put-put parity between options on the underlying index and the associated leveraged ETFs. The paper examines comparative measures of return and risk on the underlying indices, along with covered call and protective put positions. Findings - – Using the formulations derived, this study shows options on non-leveraged ETFs or on the underlying index can be substituted for leveraged ETF options. Empirical results suggest substituting options on leveraged ETFs with options on the underlying index or index ETF give comparable results, but can differ as the realized leverage ratio over time differs from projected values. Originality/value - – This study is the first to the authors’ knowledge that investigates option strategies on leveraged and inverse ETFs of equity indices. It is also the first to derive call-call and put-put parity relations between options on ETFs and related leveraged and inverse ETFs. The results contribute to securities issuance, investment strategies, and option parity relations.

Senior Loan Funds as a Money Market Alternative

This study examines the use of leveraged exchange traded funds (LETFs) within a constant proportional portfolio insurance (CPPI) strategy. The advantage of using LETFs in such a strategy is that it allows a greater percentage of the portfolio to be invested in the risk-free rate relative to a traditional CPPI. Where a standard CPPI strategy may require 50% of the portfolio to be invested in equities, using a 2x LETF only requires 25%, and a 3x LETF only requires 16.7%. Results show when the risk-free asset is yielding at least 3%, the use of LETFs within a CPPI framework results in annual returns approximately 0.5% to 1.3% higher with better Sharpe, Sortino, Omega, and Cumulative Prospect Values while reducing Value at Risk (VaR) and Excess Shortfall (ES) below VaR.

Do Leveraged ETFs Increase Volatility

Senior or bank-loan funds are becoming an increasingly popular alternative to money-market funds despite their increased risk. Senior loans are generally variable interest rate loans made to corporations with average to poor credit ratings. The attraction for investors is that senior loans should not lose their value as interest rates rise and, in fact, should generate higher yields as rates increase. In addition, senior loans usually hold collateral against the borrowers assets, and thus the cost of default is lower than with typical high-yield bonds. We explore the characteristics of these funds to determine: 1) whether they do in fact move in tandem with interest rates, and 2) what role they should play as a money-market alternative.