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Performance of Japanese leveraged ETFs

Highlights•Japanese leveraged ETFs employ only futures contracts to deliver target returns.•Benchmark indices of Japanese equity leveraged ETFs are derived leveraged indices.•Cost of carry model is used to study the performance of futures-based leveraged ETFs.•Feature of dividend clustering of Japanese stocks has the calendar effect on fund performance.•Funds with positive (negative) leverage ratios outperform (underperform) their targets, a pattern opposite to the findings of US-listed equity leveraged funds.AbstractThis study investigates the tracking performance and pricing efficiency of five groups of equity leveraged ETFs traded in Japan. One distinguishing feature of these leveraged ETFs is that they employ only futures contracts to achieve their desired exposures on the benchmark index. This allows us to develop a framework to determine their theoretical returns, based on the costs of carry of their underlying assets. The empirical results show that funds with positive (negative) leverage ratios tend to outperform (underperform) against their benchmarks, a pattern the opposite of US-listed equity-index tracking funds. Moreover, this outperformance/underperformance pattern concentrates on the popular ex-dividend dates of the constituent stocks of the underlying index. By using our theoretical framework, we reconcile these performance behaviors that can be attributed to the heavy reliance on futures contracts.

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