SPUU Is Still In Negative Drift Mode: August Leveraged ETFs Dashboard (NYSEARCA:SPUU)

The Direxion Daily S&P 500 Bull 2X Shares ETF (NYSEARCA:SPUU) is an instrument magnifying the broad market performance for trading purposes. However, its daily 2X leverage factor is a source of drift. It must be closely monitored to detect changes in the drift regime. This article explains what “drift” means, quantifies it for 22 leveraged ETFs, and focuses on SPUU drift history.

Why do leveraged ETFs drift?

Leveraged ETFs often underperform their underlying index, leveraged by the same factor. The decay has essentially four reasons: beta-slippage, roll yield, tracking errors, management costs. Beta-slippage is the main reason in equity leveraged ETFs. To understand what is beta-slippage, imagine a very volatile asset that goes up 25% one day and down 20% the day after. A perfect double 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

And the perfect leveraged ETF?

(1 + 0.5) x (1 – 0.4) = 0.9

Nothing has changed for the underlying asset, and the ETF price is down 10%. It is the normal behavior of a leveraged and rebalanced portfolio. In a trending market, beta-slippage can be positive. 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

The perfect 2x leveraged ETF is up 44%:

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

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

Without a demonstration, it shows that the higher the volatility, the higher the decay. Hence, its name: “beta” is a statistical measure of volatility. However, it is a bit misleading because the decay cannot be calculated from beta.

Monthly and yearly drift watchlist

There is no standard or universal definition of leveraged ETF drift. 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 sponsored by Credit Suisse and UBS: CEFL, BDCL, SDYL, MLPQ, MORL.

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

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

“Decay” means negative drift.

Index	Ñ	Ticker	1-month Return	1-month Drift	1-year Return	1-year Drift
S&P 500	1	SPY	1.00%	0.00%	22.00%	0.00%
	2	(SPUU)	1.11%	-0.45%	36.85%	-3.58%
	-2	SDS	-1.13%	0.44%	-25.24%	9.38%
	3	UPRO	1.23%	-0.59%	52.78%	-4.41%
	-3	SPXU	-2.09%	0.30%	-38.03%	9.32%
ICE US20+ Tbond	1	TLT	5.45%	0.00%	-1.52%	0.00%
	3	TMF	15.32%	-0.34%	-23.16%	-6.20%
	-3	TMV	-13.73%	0.87%	8.15%	1.20%
NASDAQ 100	1	QQQ	-2.25%	0.00%	23.62%	0.00%
	3	TQQQ	-9.00%	-0.75%	53.02%	-5.95%
	-3	SQQQ	5.79%	-0.32%	-45.38%	8.49%
DJ 30	1	DIA	4.40%	0.00%	16.99%	0.00%
	3	UDOW	12.17%	-0.34%	36.42%	-4.85%
	-3	SDOW	-11.33%	0.62%	-28.60%	7.46%
Russell 2000	1	IWM	11.27%	0.00%	14.21%	0.00%
	3	TNA	34.64%	0.28%	17.16%	-8.49%
	-3	TZA	-28.53%	1.76%	-35.78%	2.28%
MSCI Emerging	1	EEM	0.61%	0.00%	5.04%	0.00%
	3	EDC	0.24%	-0.53%	-4.42%	-6.51%
	-3	EDZ	-1.30%	0.18%	-5.86%	3.09%
Gold spot	1	GLD	5.09%	0.00%	24.24%	0.00%
	2	UGL	9.32%	-0.43%	39.63%	-4.43%
	-2	GLL	-9.07%	0.56%	-29.68%	9.40%
Silver spot	1	SLV	-1.71%	0.00%	16.31%	0.00%
	2	AGQ	-4.76%	-0.67%	14.39%	-9.12%
	-2	ZSL	1.71%	-0.86%	-34.62%	-1.00%
S&P Biotech Select	1	XBI	6.47%	0.00%	17.69%	0.00%
	3	LABU	18.13%	-0.43%	12.74%	-13.44%
	-3	LABD	-18.07%	0.45%	-55.12%	-0.68%
PHLX Semicond.	1	SOXX	-4.56%	0.00%	32.95%	0.00%
	3	SOXL	-19.82%	-2.05%	57.43%	-13.81%
	-3	SOXS	3.08%	-3.53%	-70.22%	9.54%

Click to enlarge

The leveraged bear semiconductors ETF (SOXS) shows the worst monthly decay on this list with a drift of -3.53%, whereas the leveraged bull semiconductors and biotechnology ETFs (SOXL), (LABU) are almost tied with the largest 12-month decays, about -13%.

The highest positive drift in one month is +1.76% for the leveraged bear Russell 2000 ETF (TZA). Several ETFs have a 12-month drift between +9% and +10%: SOXS, GLL, SPXU, SDS.

SPUU is in moderate negative drift on both time frames.

Positive drift follows 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”). For example, leveraged ETFs in semiconductors (bull and bear) show a significant 1-month decay because this industry has been very volatile lately.

SPUU drift history

Since inception on 5/28/2014, SPUU has gained 520% (19.6% annualized), while SPY is at +246% (13% annualized) in the same period. The ratio of total returns is lagging the daily leveraging factor, but it still looks acceptable. However, it is misleading: a simulation with synthetic prices starting in January 2000 is more pessimistic: SPUU and SPY are almost on par at +490% (7.5% annualized). Over two market cycles, the leveraged ETF (simulated) has not done better than the non-leveraged underlying index. Moreover, its maximum drawdown is -89%.

The next chart plots the 12-month drift since January 2000 using synthetic prices based on the underlying index. The historical average is -1.95%, which is a bit better than -2.14% for the 3x bull ETF UPRO (plotted on the second chart).

The difference looks insignificant, but UPRO simulation reports a return of only 226% on this 23-year period (4.9% annualized).

Takeaway

Direxion Daily S&P 500 Bull 2X Shares ETF is a good trading instrument in a bull market. However, it suffers a significant decay when the S&P 500 oscillates between positive and negative daily returns. Implied volatility (quantified by the VIX index) is not directly related to decay, but it may be a warning. The 12-month drift of SPUU has been continuously negative since January 2022, despite the 2023-2024 market rally. Even if SPUU is less risky than UPRO or SPXL, it has been designed for seasoned investors with a good understanding of its behavior behind the advertised leveraging factor.