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Portfolio & Derivatives

Strategy
North America Market Commentary 27 March 2009

Phil Mackintosh
+ 1 212 325 5263
ETF Trade Strategy
Victor Lin
+ 1 617 556 5658 Triple Trouble

Key points Leveraged ETFs failing to Deliver?


¾ Leveraged ETFs have been, by far, the We first focused on the leveraged ETF products back in 2008, in our Double
most popular new category of ETF in the Trouble report. This report goes into more depth on some of the
past 2 years. “surprising” performance we’ve seen thanks to the way leveraged index math
works – and highlighted the path dependency and volatility exposure of these
¾ Despite a quadrupling of volatility leveraged
leveraged ETFs.
long and short ETFs have attracted
significant assets and even more liquidity. Despite volatility more than quadrupling in the past 2 years, the double ETFs
¾ There are now a selection of triple ETFs – have been the single most popular recent invention in the ETF market. So
to complement the wide range of double popular in fact, that Direxion have recently launched triple ETFs in November
long and short ETFs. of 2008. These have already attracted $1.8bn in assets.
¾ Back in 2008, we highlighted the path But in the press, leveraged ETFs continue to attract criticisms:
dependency of these ETFs, by modelling
„ Many long-term holders have underperformed 2x their underlying beta. A
the indices they track.
sign that few understand how leveraged indexes perform.
¾ In this report we review realized returns
that have surprised many longer-term „ In addition, the media seems to blame the leveraged products for MOC
investors (despite our earlier report). volatility. A factor we think is being over-exaggerated.
¾ We show that tracking error is not We think neither criticism is fair – and show why in this report.
(generally) responsible for the
underperformance of the ETFs Long Term Performance Misses?
¾ But the huge increased in volatility has Some double short indexes are actually down over the last 12 months, even
contributed significantly to longer term though their underlying long benchmarks are also down, sometimes over
underperformance (vs beta x1 indices) 50%.
¾ We also show that leveraged ETFs will Most often cited are the double short REIT, Oil and Financials ETFs; where
outperform in periods of momentum short trades have actually exaggerated underperformance, instead of acting
with lower volatility – making them a as a hedge or short view. (See Exhibit 1 – Double short oil & gas [DUG] vs
dangerous short. Long Energy [IYE]).
¾ Especially in the current high volatility, Exhibit 1: IYE vs DUG Performance
leveraged ETFs work better as extremely
short-term trading tools than for long-term
investments.

Source: Credit Suisse: Portfolio Strategy


Portfolio & Derivatives Strategy

Exhibit 2: Misconceptions Run High in Volatile Times (Spread b/w


what S&P 500 2x funds return and what many mistake them to return Tracking error is not the cause
using a one month holding period) The media, and general investors, commonly blame this underperformance on
25%
tracking error – however, this is rarely the biggest factor. Many investors
20%
mistake the leveraged ETFs to return a multiple of the underlying index
15% regardless over their total holding period, whether it be days or months.
10%
In fact, these ETFs are only designed to double (or triple) the return of the
5%
underlying index each day (as are the underlying benchmarks). As a result,
0%
the best way to prove that a leveraged ETF is performing as mandated is to
-5%
look at daily correlations vs the underlying index. As we show in Exhibit 4
-10%
below, correlations for SKF are almost perfectly positive or negative – with a
-15%
Beta of close to +/-2, despite it’s long-run returns failing to hedge UYG.
-20%
1/20/1998 1/20/2000 1/20/2002 1/20/2004 1/20/2006 1/20/2008 Over the course of just a month, this can cause significantly different
Credit Suisse Portfolio Strategy performance than the expected 2x or 3x notional. But it’s not always a drag
on performance. Exhibit 2 shows the difference between 2x rolling month
returns and what the ETF return was. We also highlight that this difference is
especially large during volatile markets (like we’ve experienced recently).
Exhibit 3: 12 Month performance (vs Underlying) Exhibit 4: Correlation (with Underlying)

$220x2
$220x10%x2 =
$44

$20x10%x2 =
$100x2
$4
$100x10%x2 $20x2
= $20

Pair Statistics
Correlation -0.99
R-Squared 0.98
Beta -0.99

Pair Statistics
Correlation -0.96
R-Squared 0.93
Beta -1.02

Credit Suisse Portfolio Strategy

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Portfolio & Derivatives Strategy

A Hidden Investment Strategy


Confounding Compounding Problem
Exhibit 5: Volatility Drag Increases Exponentially For a
To fully understand the long-term performance of these ETFs – it is important
Constant Level of Expected Return
250%
to understand the underlying index mathematics – which we included in the
Realized Return appendix of our Double Trouble report.
200%
Volatility Drag
150% Expected Return Most importantly, indexes use geometric returns – where the return from each
day compounds on the prior days portfolio. (As a quick example, consider
100%
these daily returns [+20% and -10%]. The simple average (or arithmetic
50%
mean) would be 5%, whereas the geometric mean, and what the investor
0% actually realizes, is 4%.
-50%
The difference between the compounded return and simple average return
-100% can be considered the volatility drag. A common approximation relating the
-150% geometric mean with the arithmetic mean is:
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
Geometric mean ≈ Arithmetic mean – (0.5 x volatility^2)
Volatility
Source: Credit Suisse: Portfolio Strategy How does this relate back to leveraged ETFs? The index math doubles, or
triples the compounding effect – as we discuss below.

Dynamic Rebalancing in Practice ETFs Reset Daily: Magnifies Compounding Problem


When you buy an investment on credit, as the investment goes up, your
Imagine 2 investors buy a double-long ETF, one day leverage actually reduces. (Leverage = Assets/(assets-borrowings), so as
apart….but the market moves 10% on the first day: assets increase, leverage falls).
1. The first investor buys when the ETF (and the However it would be very difficult to explain to a 3x ETF buyer that today’s
underlying) are both $100 leverage is actually 2.7x, because the market is “up recently”. To ensure
2. The double long ETF will use his $100, and every new investor gets the advertised leverage ratio, the ETFs (and the
double it (using futures or a swap) – creating indices) reset their leverage at the end of each day. This ensures a constant
$200 exposure to the market leverage ratio. We discuss the mechanics of this in the sidebar. In summary:
3. The 10% return will generate $20 profit ($200 „ The ETFs must be double the previous nights close – each day.
x 10%) in the ETF. This matches the 20%
return (10% x 2) that the ETF was designed to „ After making a gain – they need to increase their exposure. After making
achieve. Consequently, the ETF should close a loss – they need to decrease their exposure (& repay borrowings). This
at $120, equal to its net asset value. means the ETFs need to rebalance each night. This trade is larger on
volatile trade days.
4. The assets in the ETF at the end of day 1 are
$220 ($100+$100+$20) „ Both (long and short) ETFs buying on up days, and selling on down days
5. On Day 2, Investor 2 wants to go double long. (for example, on a down day, the short ETF makes gains and the long
Ignoring overnight risk, this will cost $120 for ETF has losses – so the short ETF has to short more to add to exposure
the ETF while the long ETF sells to reduce exposure)
6. Investor 2 expects to have $240 ($120 x 2) in „ This re-investment process is similar to negative gamma experienced by
the market. Options market makers. As the ETF buys high, and sells low, in a volatile
7. However, as we noted in step 4, the underlying market, this reduces performance. However in a trending market, it
ETF assets are just $220. compounds gains on gains – exaggerating the momentum, and exposure.
To overcome this problem – leveraged ETFs need
to trade MOC of Day 1 to also leverage their Exhibit 6: Leverage & Compounding
Bought $20 more stock at $110
unrealized gains. $120 Average price is now >$100

What about UltraShort? Double


Long
Using the same approach, a leveraged short ETF $110
would need to reduce its unrealized losses (or buy- +10%
-9. 1%
back some of its short positions).
$100 $100 = $110 x (1 - 9.9%)
$98.18 = $120 x (1 - 9.9%)

Credit Suisse Portfolio Strategy

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Portfolio & Derivatives Strategy

Exhibit 7: UCO (daily reset) vs DXO (monthly reset) Does Reset Frequency Matter?
140.00 Almost all leveraged ETFs currently listed have their leverage reset daily in the
rebalancing process described in this report. However, some ETFs such as
120.00
the PowerShares DXO (2x long crude) are reset monthly. Rather than
100.00
receiving twice the daily return of the underlying index, investors receive twice
80.00 the monthly return. Does this significantly affect returns?
60.00 To compare, we calculate a theoretical 2x leveraged daily reset version of
40.00 DXO. In general, the two have similar performance when volatility is on the
20.00
DXO (Monthly reset) lower side. However, high volatility levels widen the performance differential
UCO (Daily Reset)
Oil Future (front month) between the daily and monthly reset series as it magnifies the effect of
-
leverage and the short gamma exposure described earlier.
11/25/08 12/15/08 1/4/09 1/24/09 2/13/09
Exhibit 8: Daily and Monthly Reset Differences Magnified in High Volatility
Credit Suisse Portfolio Strategy
6 90

4 80
70
Cumulative Spread

Realized Volatility
2
60
0 50
-2 40
30
Exhibit 9: Daily vs Monthly Reset, 2x Long Crude -4
20
140
-6 10
120 S p re a d V o la ti li ty
2x monthly (DXO NAV) -8 0
100 2x daily 6 /1 7 /0 8 8 /1 7 /0 8 1 0 /1 7 /0 8 1 2 /1 7 /0 8 2 /1 7 /0 9
DBOLIX Index Source: Credit Suisse: Portfolio Strategy
80
We show (below, Exhibit 20) an exaggerated example between daily and
60
weekly leverage resets to illustrate how extremely volatility can affect their
40
performance. While it’s unlikely such a scenario would occur, it does show
20 how high volatility and different reset periods can significantly affect returns.
0 Exhibit 10 : Daily vs Weekly Reset Example
6/17/08 8/17/08 10/17/08 12/17/08 2/17/09 Rolling 2 x
2x 2x ETF Weekly Weekly 2x ETF
Credit Suisse Portfolio Strategy
Index Return Return (daily) Return Return (weekly)
100 100.00 100
Day 1 75 -25% -50% 50.00 -25% -50% 50
Day 2 63 -16% -32% 34.00 -37% -74% 26
Day 3 61 -3% -6% 31.84 -39% -78% 22
Day 4 51 -16% -33% 21.40 -49% -98% 2
Day 5 100 96% 192% 62.53 0% 0% 100
Source: Credit Suisse: Portfolio Strategy

Exhibit 11: DXO Underlying Diverges from UCO Underlying Underlying Matters Most!
160 So does the reset frequency explain the difference in performance between
140
the monthly reset DXO and the daily reset ProShares UCO that many
investors have noted recently?
120

100 It does partly contribute, but in this particular case, it’s the benchmarks that
80 are more responsible for the difference than the reset period. As with all
60
ETFs the underlying benchmark can be very important. Especially for futures
DJAIGCL (UCO Underlying)
based ETNs, used in many crude oil ETFs, the roll treatment and calculation
40 DBOLIX (DXO Underlying)
can, in fact, be quite different.
20 WTI Crude Front Mo. Future

0 While both DXO and UCO track crude futures based indices, DXO tracks the
1/2/08 3/2/08 5/2/08 7/2/08 9/2/08 11/2/08 1/2/09 Deutsche Bank Optimum Yield Crude Oil index while UCO tracks the Dow
Jones-AIG Crude Oil sub index. The two had been tracking closely, but have
Credit Suisse Portfolio Strategy
recently diverged – the primary reason being that the indices use different
rules which may result in the selection of different expiration contracts or
rolling futures at different times.

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Portfolio & Derivatives Strategy

Path Dependency is Misunderstood


Exhibit 12: Historic performance of 2x Long and Short Short Term Trading Tool: Ride Momentum!
Funds using real market returns and volatility Especially at the moment, it feels like both long and short ETFs underperform
250.00 – but that’s not always the case.
Bull Bear Bull Bear
Because of the dynamic rebalancing of the ETF (discussed above) there is a
200.00
Ultra Bull significant degree of path dependency of returns. Those who perfectly time
Ultra Bear the market can ride momentum and substantially increase gains (as Exhibit
150.00 S&P 500 12 shows – during trending markets, the leveraged ETFs give outsized
exposure to the overall trend).
100.00
But long-term holders can easily find:

50.00 „ Gains increase exposure to a market correction. Note how in the


1990’s bull market, and UltraBull ETF pulled back sharply each time a
small correction occurred.
-
1/1/97 1/1/99 1/1/01 1/1/03 1/1/05 1/1/07 1/1/09
„ Losses reduce exposure to a market correction. Note from Exhibit
Source: Credit Suisse: Portfolio Strategy
12, that a double long ETF bought in 2001 would have underperformed
so much in the bear market, that it would not have recovered to par –
even with the underlying stock market hitting new highs.
„ Range-bound markets decay. Range bound markets, like those
highlighted in 2004, are not suited top leveraged ETFs. Performance will
show a gradual decay thanks to the borrow costs, and negative stock
timing.
Consequently, these products are generally better suited to active traders.

Long Term Holders note: Good in Momentum, Bad when Volatility Rises, or Markets Turn
By simulating specific market regimes, we can more clearly illustrate the risks & benefits of holding a leveraged ETFs.

Exhibit 13: Good in Trending Markets Exhibit 15: Bad thru Market Cycles Exh 17: Range Bound & Volatile Market
ULTRA-SHORT ULTRA-SHORT
$330 $200 ULTRA-SHORT
$150
$180 -SPY
-SPY SPYx-2
$280 $160 SPYx-2
SPYx-2 -SPY
Share Price

$140 UltraShort
Share Price

$125 UltraShort
UltraShort
Share Price

$230 $120
$100
$100
$180 $80
$60
$130 $40 $75
$20
$80 $- $50
0 140 280 420 560 700 840 980 112012601400 0 140 280 420 560 700 840 980 1120 1260 1400 0 140 280 420 560 700 840 980 1120 12601400
Days

Exhibit 14: Good in a Trending Market Exhibit 16: Bad thru Market Cycles This shows that Leveraged ETFs:
ULTRA LONG
$430 $200
ULTRA LONG
„ Work well in a trending market as
$380
SPY
$180 momentum and compounding can
SPY
$330 SPYx2 $160
SPYx2 combine to produce significant
Share Price
Share Price

$280 Ultra $140 Ultra outperformance (Exhibit 13 & 14).


$120
$230
$100 „ Compounding leaves them adversely
$180
$80 exposed to shifts in market cycles
$130 $60
(Exh 15 & 16)
$80 $40
0 140 280 420 560 700 840 980112012601400 0 140 280 420 560 700 840 980 11201260 1400 „ Suffer in range bound markets,
D Days
especially when volatility is high.

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Portfolio & Derivatives Strategy

Volatility Makes Long Term Returns All Skewed Up!


The impact of volatility can also be seen by modeling the long term distribution
of leveraged ETF returns. Under the assumption that daily returns are
Exhibit 18: Assuming a 0 Mean, Median Returns Decrease as
Leverage and Volatility Increases independent and identically distributed, compounding these returns creates a
lognormal distribution. A typical lognormal distribution is positively skewed
1x 2 times 1x 2x short 2x 3x short 3x
10%
where the median value is less than the mean. The higher the volatility of
0% returns, the more pronounced the skew – and the less likelihood that an
-10% investor will achieve at least the mean return.
-20%
In Exhibit 20, we visually depict the impact of 1%, 20%, and 40% volatility on
-30%
a Zero-mean lognormal distribution. This highlights that although the average
-40%
1% Volatility remains = zero, the median becomes increasingly negative as volatility
-50%
-60%
10% Volatility
increases. This means a higher proportion of observations will underperform
20% Volatility
-70% 40% Volatility
(however it also means there are some extreme ‘winners’).
60% Volatility
-80% With little volatility, investors would expect to outperform the mean almost half
-90%
of the time. As volatility increases, this percentage decreases. Thus, the
Credit Suisse Portfolio Strategy more volatility, the more skewed the distribution, and the less likelihood
investors will be on a path that achieves at least the expected return.

Exhibit 19: Assuming a 0 Mean, Magnitude of Beta For Shorts


Drops Off As Leverage and Volatility Increases Exhibit 20: Distribution Becomes More Skewed As Volatility Increases

3.5
1% Volatility 10% Volatility
3
20% Volatility 40% Volatility
60% Volatility 2 .5
2.5

2 2 .0
1.5
1 .5
1

0.5 1 .0

0
0 .5
short 2x short 3x

Credit Suisse Portfolio Strategy 0 .0


-1 .0 -0 .5 0.0 0 .5 1 .0
R eturn (% )

Source: Credit Suisse: Portfolio Strategy

And Distorts Concept from Reality


Another way to look at this is to consider the difference between a whole
Exhibit 21: Leveraged ETF – 2x Index Spread
Magnified in High Volatility Times month leveraged return (using a margin account) vs holding the ETF for a
100%
month.
1.4
We can see from Exhibit 21 that the difference a margin account and an ETF
50%
1.2 return differs most in high volatility regimes. The fact that realized volatility
0% 1
has been running (well) above 40% for most of the last 9 months is
exceptional – and is adversely impacting these ETFs.
Volatility (%)
Spread (%)

0.8
-50% Long Spread
Short Spread
In such a high volatility environment, derivatives such as futures, swaps, and
0.6
-100% Volatility options may be better suited for investors looking for leveraged exposure over
0.4 a longer time horizon.
-150%
0.2 In lower volatility regimes, the differences between leveraged returns should
-200% 0 be less significant.
12/9/98 12/9/00 12/9/02 12/9/04 12/9/06 12/9/08

Source: Credit Suisse: Portfolio Strategy

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Portfolio & Derivatives Strategy

Zero Sum Game?


So you’ve worked out the releveraging math – and you’re willing to trade every day to rebalance a $100 portfolio back to 2 equal
$50 legs (double long & double short). Does an arbitrage exist from them somehow by buying (or shorting) both.
Theoretically holding both should yield: cash returns - carry costs.
In fact, this relationship has held true (except for the period last year where there were short sell restrictions which severely
hampered the efficiency and arbitrage of inverse ETFs), as we show below.
Ultrashorts + Ultralongs = ~0, Except During Short Sell Restricted Period
Short sell restrictions 120
8%
SSO + SDS
6% 100
UYG + SKF
4%
80
2%
0% 60
SSO + SDS
-2%
40 UYG + SKF
-4%

-6%
20
-8%

-10% 0
1/2/2008 4/2/2008 7/2/2008 10/2/2008 1/2/2009 1/2/2008 5/2/2008 9/2/2008 1/2/2009

Credit Suisse Portfolio Strategy

Exhibit 22: 3x Leveraged ETFs


Name Ticker Assets
Triple Leveraged ETFs Take Off
Direxionshares Financial Bull 3X Shares FAS $ 450,775,500 With the popularity of the double leveraged ETFs, Direxion launched 8 triple
Direxionshares Large Cap Bull 3X Shares BGU $ 362,461,600
Direxion Financial Bear 3X Shares FAZ $ 248,422,700
leveraged ETFs in November and another 6 in December of 2008. Rather
Direxionshares Small Cap Bull 3X Shares TNA $ 225,949,500 than shy away amidst record volatility, traders have embraced these ETFs,
Direxionshares Large Cap Bear 3X Shares BGZ $ 185,635,900 which have already attracted $1.8bn in assets.
Direxionshares Small Cap Bear 3X Shares TZA $ 133,244,600
Direxionshares Energy Bull 3X Shares ERX $ 92,650,450 Exhibit 23: BGU (3x Long Russell 1000) vs SSO (2x Long S&P 500)
Direxion Energy Bear 3X Shares ERY $ 27,339,640
Direxionshares Emerging Markets Bear 3X Shares EDZ $ 18,437,500
Direxionshares Emerging Markets Bull 3X Shares EDC $ 16,294,950
Direxionshares Technology Bull 3X Shares TYH $ 15,546,960
Direxionshares Developed Markets Bear 3X Shares DPK $ 9,425,000
Direxionshares Technology Bear 3X Shares TYP $ 6,343,000
Direxionshares Developed Markets Bull 3X Shares DZK $ 2,808,260
Credit Suisse Portfolio Strategy

Exhibit 24: Daily Return Distribution of S&P 500, 2x, & 3x

S&P 500

Source: Credit Suisse: Portfolio Strategy

Functionally, triple leveraged ETFs work the same way as double leveraged
2x ETFs with the obvious difference being that leverage, and consequently
3x
volatility, is increased. As leverage increases, return distributions become less
peaked and fatter tailed, meaning a higher frequency of large moves.

-0.10 -0.05 0.00 0.05 0.10 0.15 Additionally, as previously discussed, a 3x ETF will effectively increase
volatility by at least a factor of 3, leading to a more heavily skewed long-run
Credit Suisse Portfolio Strategy
lognormal distribution.

7
Portfolio & Derivatives Strategy

Exhibit 25: S&P Intraday Volatility High at Open/Close Are Leveraged ETFs Increasing Close Vol?
3.0%

Jul-08
As we highlighted in our report, Intraday Rollercoaster Rides: Market Moves at
Day’s End, in late 2008 closes became very volatile and difficult to trade.
30-min Intraday Price Movement

2.5% Aug-08

2.0%
Sep-08
Oct-08
There was some media speculation that leveraged ETFs were a big
1.5%
Nov -08 contributor. We think this was overplayed:
Dec-08

1.0%
Jan-09
Feb-09
1. Leveraged ETFs are less than 2% of end-of-day trading
0.5%
As we showed earlier, leveraged ETFs need to trade into the close to realign
their exposure appropriately for the following day’s open. We estimate that
0.0%
this rebalancing accounts for less than $1.5 billion (see sidebar), while around
9:30

10:30

11:30

12:30

13:30

14:30

15:30

$70 billion trades in the last half-hour based on our calculations, leveraged
Credit Suisse Portfolio Strategy
ETFs are only a very small percentage of that ($1.5 billion / $70 billion =
2%).
Average daily amount of rebalancing required Exhibit 26:
( Closing
) Volumes Likely Dwarf Leveraged ETF Rebalancing
for leveraged ETFs: ~ $1.4 billion 8%
A v erage D aily V o lume C urv es O v er T ime (S & P 5 0 0 )

total assets in leveraged ETFs: ~ $20 billion


7%
„
6%
2006-2007
„ assuming an average magnitude intraday 5% J ul- 0 8

move in the S&P of: 3.5% 4%


Au g- 0 8
S ep - 0 8
O c t-08
„ average amount needed to trade each day to 3%
N ov - 0 8

readjust to market moves: 3.5% (average


2% D ec - 0 8
J an- 0 9
1%
move) * 2 (leverage) * $20 billion (total F e b- 0 9
0%
assets) = $1.4 billion
9 :3 0

1 0 :0 0

1 0 :3 0

1 1 :0 0

1 1 :3 0

1 2 :0 0

1 2 :3 0

1 :0 0

1 :3 0

2 :0 0

2 :3 0

1 :0 0
3 :0 0
2:0 0

1 2 :3 0
3 :3 0
2:3 0

1 2 :0 0
4 :0 0
3:0 0

1 1 :3 0
3:3 0

1 1 :0 0
4:0 0

1 0 :3 0
1 0 :0 0
9 :3 0
Total amount of trading in the last 30 min: c2t -0008 6 - 2N0o0v 7- 0 8 J uDl-e0c 8- 0 8 A uJ agn- -0089 FSeebp- 0
- 09 8 O ct-08 N ov -08 D ec -0 8 Jan-0 9 F eb-0 9
~$70 billion
Source: Credit Suisse: Portfolio Strategy

Amount of EOD Trading from Leveraged ETFs:


2. Leveraged ETFs should ADD to the day’s moves
$1.5bn/$70bn ~ 2% As we also showed earlier, leveraged ETFs (both long and short) are short
gamma, meaning they must buy when the market goes up and sell when the
market goes down. Thus, their activity into the close should confirm the trend
Exhibit 27: High Rate of End of Day Reversals from the rest of the day.
Move Prior to 3 PM Continues However, we find that in the most volatile months (Oct & Nov 2008), the
in Last Hour? market reversed the intraday trend in the last hour 40% of the time. The
opposite direction to the leveraged ETF trades.
3. Momentum is already a strong factor
No According to our Quant research teams analysis, momentum has been one of
38% the best performing factors in the past 12 months. This would partially
Yes explain some momentum into close. We also highlight that the leveraged
62% ETFs trade should occur MOC, to eliminate basis risk for the ETF
performance. Despite this, we observe market rallies and sell-offs have often
occurred an hour (or more) before the end of the day.
Effect More Apparent at Sector Level?
Credit Suisse Portfolio Strategy
Although the magnitude of ETF trading on broad market indices is small, we
acknowledge that the rebalancing may have more influence on less liquid
stocks or at the sector level.
Exhibit 28: Financials Exhibit Higher Frequency
Same Direction Moves We examined financials, energy, and real estate sectors, that all have
Energy Financials Real Estate significant leveraged ETFs assets. Since last September, the direction of the
Opposite 44% 32% 28%
last hour confirmed the prior day’s move much more frequently in financials
Same 56% 68% 72%
and real estate , and the frequency of same direction moves was higher in
Source: Credit Suisse: Portfolio Strategy
financials and real estate than in prior years. This would seem to suggest that
the leveraged ETFs may be partly contributing to end of day sector moves.

8
Portfolio & Derivatives Strategy

Use EDGE to test out ETF tracking


Search Leveraged ETFs with EDGE
With over 800 ETFs listed in the US alone, traders have plenty of options for
getting exposure to different industries and even different asset classes now.
To find the right ETF for your portfolio:
• visit our website at www.credit-suisse.com/edge
• select Trade Ideas > ETFs from the menu bar
• enter desired keywords in the search box (e.g. ‘leveraged’)

Plot correlations and returns with EDGE

1. Enter tickers
2. Select chart type Pair characteristics
3. Input date range

9
Portfolio & Derivatives Strategy

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Colin Goldin +44 20 7888 9637 colin.goldin@credit-suisse.com This material has been prepared by individual traders or sales personnel of Credit
Suisse and its affiliates ('CS') and not by the CS research department. It is not
Laurent Boldrini +44 20 7888 2041 laurent.boldrini@credit-suisse.com investment research or a research recommendation, as it does not constitute
Marwan Abboud +44 20 7888 0082 marwan.abboud@credit-suisse.com substantive research or analysis. It is provided for informational purposes, is intended
for your use only and does not constitute an invitation or offer to subscribe for or
Raymond Hing +44 20 7888 7247 raymond.hing@credit-suisse.com purchase any of the products or services mentioned. The information provided is not
Sikander Samar +44 20 7888 0604 sikandar.samar@credit-suisse.com intended to provide a sufficient basis on which to make an investment decision. It is
intended only to provide observations and views of individual traders or sales personnel,
which may be different from, or inconsistent with, the observations and views of CS
Asia research department analysts, other CS traders or sales personnel, or the proprietary
Murat Atamer +852 2101 7133 murat.atamer@credit-suisse.com positions of CS. Observations and views expressed herein may be changed by the
trader or sales personnel at any time without notice. Trade report information is
preliminary and subject to our formal written confirmation.

CS may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit
business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. The most recent CS research on any company mentioned is at
http://www.csfb.com/researchandanalytics.

Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself
designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any
time, for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce
significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor a guarantee of future returns. Actual results will
vary from the analysis.

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future
performance. The information set forth above has been obtained from or based upon sources believed by the trader or sales personnel to be reliable, but each of the trader or
sales personnel and CS does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes in
market factors. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular
market.

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