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INTRODUCTION
The majority of the first Generation's Exchange Trade Funds (ETFs) traded on the United States and other stock exchanges worldwide aim at replicating the performance of a known index or benchmark either at the short-run or the long-run level. To do so, ETFs are usually fully invested in the securities of the underlying index, even though synthetic replication is also applicable. They are basically passively managed, which means that the synthesis of the managed portfolio usually changes only in response to changes in the components of the tracking benchmark.
The growing interest of investors in ETFs along with their need to apply more active investing strategies with ETFs gave birth to new more active types of ETF products, such as the leveraged and inverse leveraged ETFs, which are alternatively called bull and bear ETFs, respectively. The first leveraged and inverse ETFs were launched in the US market by Proshares in June 2006 after being reviewed for almost 3 years by the Securities and Exchange Commission. Leveraged and inverse ETFs offer investors exposure to various markets, either small, mid- or large caps, domestic or foreign, and broad or sector. In addition, they offer exposure to several asset classes such as equities, bonds, commodities, precious metals and currencies.
The leveraged ETFs aim at beating the underlying benchmarks and are designed to deliver twice or thrice the performance of the benchmark (before fees and expenses) over a pre-specified period, which usually does not exceed the one day. The inverse ETFs seek to short the market and provide performance opposite to various market benchmarks on a daily basis. 1 In order to achieve their daily targets, the leveraged ETFs are designed to include the securities in the index, but also include derivatives of the index's securities and the index itself. These derivatives include options, forwards, swaps and futures. They can also use borrowed capital to magnify the return of the underlying benchmarks. Leveraged ETFs resorting to debt aim at future profits from the investments they finance via indebtedness that will exceed the cost of borrowed capital.
The current article focuses on the performance and volatility of leveraged ETFs investing in stock indices from emerging markets. To the best of our knowledge, this is the first study in...