TY - JOUR T1 - Should Tracking Error Prevent the Use of Leveraged ETFs in the Real Estate Portfolio? JF - The Journal of Index Investing SP - 75 LP - 95 DO - 10.3905/jii.2012.3.3.075 VL - 3 IS - 3 AU - Richard J. Curcio AU - Randy I. Anderson AU - Hany Guirguis Y1 - 2012/11/30 UR - https://pm-research.com/content/3/3/75.abstract N2 - Tracking error is the deviation of a leveraged exchangetraded fund’s (ETF’s) return from the stated multiple of its benchmark index. Leveraged real estate and real estate–related ETFs, both long and inverse, are valuable tools for hedging risk and enhancing returns in the real estate portfolio. They enable the achievement of such results through timely, simple transactions that previously could be realized only through the use of complex trading tools. Tracking error poses a serious risk in the use of these leveraged ETFs, however. The issuers and regulators of leveraged ETFs warn that the returns to these funds over a period longer than one day will very likely differ from the fund’s target return. Academic researchers further warn that annual leveraged ETF returns fall well short of their stated daily objectives and, under volatile conditions in the benchmark index, can lead to eventual value destruction.The results of this research confirm the appropriate concern for caution in using leveraged ETFs. Naïve buy-and-hold investment in leveraged real estate ETFs can result in value destruction. Nevertheless, balancing the advantages of leveraged ETFs with the risks, we conclude that the tracking error associated with using leveraged ETFs beyond a single trading day should not prevent investment managers from using these ETFs in real estate portfolios. To be sure, leveraged ETFs are valuable tools for use in hedging risk and enhancing returns and, under appropriate circumstances, with great care and frequent monitoring, can be judiciously employed for longer than a single trading day by skilled traders and well-informed portfolio managers.TOPICS: Exchange-traded funds and applications, real estate, portfolio construction ER -