SPXL Drift History And Leveraged ETFs Dashboard (NYSEARCA:SPXL)

Direxion Daily S&P 500 Bull 3x Shares ETF (NYSEARCA:SPXL) is one of the most popular instruments to trade in bullish market conditions. It is a competitor and an equivalent to ProShares UltraPro S&P 500 [ETF 3x Shares] (UPRO). The daily 3X leverage factor is a source of drift, which may be positive or negative. This article explains what “drift” means, quantifies it in 22 leveraged ETFs and reports historical data on SPXL.

Why do leveraged ETFs drift?

Leveraged ETFs often underperform their underlying index, leveraged by the same factor. ETF decay may come from beta-slippage, roll yield, tracking errors and management costs. Beta-slippage is the main drift factor in equity leveraged ETFs. To understand it, imagine a very volatile asset that goes up 25% one day and down 20% the day after. A perfect 2x leveraged ETF goes up 50% the first day and down 40% the second day. On the close of the second day, the underlying asset is back to its initial price:

(1 + 0.25) x (1–0.2) = 1

In the same time, the perfect leveraged ETF has lost 10%:

(1 + 0.5) x (1–0.4) = 0.9

Nevertheless, beta-slippage can be positive in a trending market. If the underlying index goes up 10% two days in a row, on the second day, it is up 21%:

(1 + 0.1) * (1 + 0.1) = 1.21

Then the perfect 2x leveraged ETFs is up 44%:

(1 + 0.2) * (1 + 0.2) = 1.44

Moreover, beta-slippage is path-dependent. If the underlying index gains 50% on day 1 and loses 33.33% on day 2, it is back to its initial value, like in the first example. However, the 2x ETF loses one third of its value, instead of 10% in the first case:

(1 + 1) x (1–0.6667) = 0.6667

Monthly and yearly drift watchlist

There is no standard definition for the drift of a leveraged ETF. Mine is based on the difference between the leveraged ETF performance and Ñ times the performance of the underlying index on a given time interval, if Ñ is the leveraging factor. Most of the time, this factor defines a daily objective relative to an underlying index. However, some dividend-oriented leveraged products have been defined with a monthly objective (mostly defunct ETNs issued by Credit Suisse and UBS: CEFL, BDCL, SDYL, MLPQ, MORL…).

First, let’s start by defining “Return”: it is the total return of a leveraged ETF in a given time interval. “IndexReturn” is the total return of a non-leveraged ETF on the same underlying asset in the same time interval. “Abs” is the absolute value operator. “Drift” is calculated as follows:

Drift = (Return – (IndexReturn x Ñ))/ Abs(Ñ)

“Decay” means negative drift.

Click to enlarge

The leveraged bull semiconductors ETF (SOXL) has the worst monthly decay: -1.1%. The highest monthly positive drift is +0.71% for the leveraged bear long-term T-bond ETF (TMV).

Leveraged biotechnology ETFs, both bull (LABU) and bear (LABD) have the worst 1-year decays, almost on par at -9.8%. Leveraged bear ETFs based on the Nasdaq 100 (SQQQ) and semiconductors (SOXS) have the highest positive drifts at about 22%.

Positive drift comes with a steady trend in the underlying asset, whatever the trend direction and the ETF direction. It means positive drift may come with a gain or a loss for the ETF. Negative drift comes with daily return volatility (“whipsaw”).

SPXL drift history

The next chart plots the 12-month drift of SPXL since inception (11/05/2008).

The average 12-month drift in this time frame is negative: -1.6%. SPXL has suffered a decay since it was launched, but it was dwarfed by the bullish trend: the total return is 3406% (over 25% annualized).

The drift fell in negative territory in the March 2020 meltdown. It jumped to +31% in April 2021 after the stock market had one of its strongest rallies in history, resulting in a high positive slippage. While SPY returned about 39% in one year, SPXL went up 162%. It is about four times the underlying index return, showing the good side of beta-slippage in a bullish trend. Then, SPXL price action became problematic for shareholders. It has lost about 36% between 3/1/2022 and 3/1/2023 while SPY was down 6.7%: it is an apparent leveraging factor close to 6 on the downside!

Simulated performance starting in January 2000 is concerning. On this period including two market cycles, SPXL annualized return would have been inferior to the non-leveraged index (3.48% vs 7.04% for SPY), with a maximum drawdown of -98%. This is a clear warning against a buy-and-hold strategy! The next chart plots the hypothetical 12-month drift starting in January 2000. The average is -2.1%.

Takeaway

SPXL and other 3x leveraged ETFs should not be long-term investments. They are trading and hedging instruments meant to be used during limited periods of time by seasoned traders who have a good understanding of their behavior.