Best Approach for Shorting Leveraged ETFs?

Is shorting leveraged exchange-traded funds (LETF) reliably attractive? In their March 2024 paper entitled “Investigating Long-Term Short Pairing Strategies for Leveraged Exchange-Traded Funds Using Machine Learning Techniques”, Hamed Khadivar, Elaheh Nikbakht and Thomas Walker test the profitability of continually shorting seven portfolios of matched pairs of bull and bear LETFs:

1. 100% bull.
2. 75% bull and 25% bear.
3. 67% bull and 33% bear.
4. 50% bull and 50% bear.
5. 33% bull and 67% bear.
6. 25% bull and 75% bear.
7. 100% bear.

They test both quarterly and annual rebalancing and explore some market conditions that affect shorted-pair performance. Their sample consists of 44 bull/bear pairs of U.S. LETFs that each have the same offeror, same underlying index, same leverage and sufficient data during 2012 through 2020 (including daily prices with no gaps in volume longer than 50 days). The underlying index for each pair (its benchmark) must have been available before 2012. They look at different levels of rebalancing frictions and shorting costs to determine profitability breakeven points. Using daily returns and other data for the 44 pairs of LETFs and their underlying indexes during 2012 through 2020, they find that: (more…)