How can daily rebalancing affect the performance of 2x leveraged equity indices?
2x leveraged equity indices are designed to provide twice the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the reference index return over that longer period. To demonstrate this we take the example of a reference index rising 5% over a 5-day period. In Scenario 1 the reference index achieves the 5% return through various up and down days. In Scenario 2 the index is up 5% over the period following 5 consecutive up days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
