I fully understand that the returns of leveraged ETFs have to reflect at least the following costs:
1) management fee - included in the expense ratio
2) borrowing costs - floating leg of the total return equity swaps pays (probably) 1M LIBOR + spread
3) other costs - this includes transaction fees, slippage, bid-ask spreads.. They are probably very low.
Neglecting 3) I end up with the following equation describing the relationship between the returns of the underlying asset (or index) and the leveraged ETF:
LETF = L*UNDERLYING - (L-1)*1M_LIBOR - SWAP*Wswap - EXPESNE_RATIO
Yet, this is not at all what I observe in case of UPRO, SSO, TQQQ.. Somehow all these ETFs beat the underlying index multiplied by the leverage. So in other words:
LETF => L*UNDERLYING
and all the costs are covered. So UPRO, SSO, TQQQ beat the simple index multiplied by the leverage ratio.
How is it possible?
Here you can see a chart of UPRO vs 3*S&P500.
Here you can see a telltale chart of UPRO vs 3*S&P500.
Do you have any idea how it is possible that UPRO, SSO, TQQQ... beat 3*S&P500 (and I mean here total return S&P500 with reinvested dividends).
Thank you very much!