Recently the SEC halted its review of highly levered ETFs in a signal they may be attempting to curb this burgeoning asset class. Source: Bloomberg, 1-year return data from 12/31/2024 – 12/3/2025. 3-year return data from 12/4/2021 – 12/4/2025. For illustrative purposes only. In the past, levered ETFs like the ones above have been reserved for large index-like asset classes which typically don't exhibit outsized volatility before additional leverage is applied. Even so, when adjusting for their Beta (Risk!) ...

Core Insights - Leveraged ETFs, such as SPXL and SPXU, provide amplified exposure to the S&P 500 but are subject to volatility drag, which can erode performance over time, especially during high volatility periods [1][3][4] - A proposed volatility filter adjusts ETF exposure based on the relationship between short-term realized volatility and implied volatility, aiming to enhance returns while mitigating drawdowns [4][5][53] Group 1: Leveraged ETFs Overview - Leveraged ETFs like SPXL and SPXU aim to deliver three times the daily return of the S&P 500, both in long and inverse directions [3] - The daily rebalancing mechanism of these funds introduces volatility drag, causing realized performance to diverge from the theoretical returns over extended periods [3][4] - The VIX index serves as a measure of implied volatility, reflecting market expectations of future volatility based on S&P 500 option prices [4][10] Group 2: SPXL Strategy - The SPXL strategy utilizes a volatility filter, investing when implied volatility (VIX) exceeds realized volatility (SPY's standard deviation), indicating favorable market conditions [17][39] - Backtesting from July 2013 to July 2025 shows that the SPXL strategy achieved an annual return of 27.68%, significantly outperforming the benchmark's 13.62% [19] - The strategy's performance improved with longer realized volatility windows, leading to higher Sharpe and Calmar ratios, indicating better risk-adjusted returns [27][33] Group 3: SPXU Strategy - The SPXU strategy operates inversely, investing when realized volatility exceeds implied volatility, suggesting potential declines in the S&P 500 [39][38] - Despite modifications, the SPXU strategy yielded weaker results, with a performance of -8.29% compared to the benchmark's 13.62% [40] - The analysis indicates that bearish leveraged exposure is more challenging to exploit systematically, although the strategy showed improvements over holding SPXU outright [54][52] Group 4: Conclusion - The analysis demonstrates that volatility-based filters can enhance the performance of leveraged ETFs, particularly for SPXL, by identifying favorable conditions for exposure [53] - In contrast, the application of the same framework to SPXU produced inconsistent results, suggesting potential for selective hedging rather than systematic exploitation [54]