Gavekal Capital: Is That Leveraged ETF Worth It? Comparing SSO and VOO

Tuesday, February 17, 2015

Is That Leveraged ETF Worth It? Comparing SSO and VOO

As ETFs control a larger number of assets under management, it is no surprise that the options available to investors are getting ever more exotic. One of the early examples (and thus we actually have history available) of exotic ETFs are leveraged ETFs. Leveraged ETFs attempt to to mimic the daily change in an index, in today's case the S&P 500, by a defined multiple (i.e. 2x, 3x, etc). Today, we will look at one of the more highly used leveraged ETF: Proshares Ultra S&P 500 (ticker: SSO).

According to the ProShares website, SSO has been around since June 2006 and charges a fee of 89 basis points. The goal, again as stated on the website, is to return two times the DAILY return of the S&P 500. We emphasize daily, as does ProShares on their website, because as we all know due to the power of compounding a security with similar daily returns can have very different returns over longer periods.  As of the end of last year, SSO had a little over $2.3 billion under management.

To add a little context to how SSO has performed, we will compare it to the low cost, "gorilla" in the room: Vanguard 500 Index Fund (ticker VOO). VOO's "admiral shares" (minimum investment is $10,000) have a ridiculously low fee of 5 basis points and manages an enormous $196 billion. Let's take a look at how these two ETFs compare on a four-year, annualized basis.

Over the past four years, SSO has returned 26.1%, while the VOO has returned 14.4%. SOO hasn't quite delivered 200% of the return of VOO but it has returned 180%. While SSO's return hasn't been twice as much of VOO's, the volatility has been. SOO has had an annualized standard deviation of 23.1% while VOO standard deviation has been just 11.4%. The max drawdown of SOO has been slightly more than 2x the max drawdown of VOO. The max drawdown of SOO over the past four years is 13.9% while the max drawdown of VOO has been 6.8%.


From a risk-adjusted perspective, SOO has delivered a higher annualized alpha of 7.7% versus VOO's annualized alpha of 5.4%. SSO's Sharpe Ratio is lower, however, it is still above 1. SSO has had a Sharpe Ratio of 1.13 while VOO has had a Sharpe Ratio of 1.27. SOO has also had a lower Treynor Ratio than VOO (14.9 vs 16.69).  Surprisingly, SSO has a higher Information Ratio than VOO (8.1 vs 7.7).


When we look at the active management statistics, we see where the leverage really comes into play. SOO has a much higher tracking error (11.6% vs 3.7%). It has has an upside capture ratio that is 2.14x as great as VOO's and a downside capture ratio that is 2.06x as great as VOO's. The good news for SOO investors is that it is at least capturing more upside than downside. SSO has a Up/Down Capture Ratio of 1.46 while SSO has an Up/DOwn Capture Ratio of 1.40.


So breaking it all down, is SOO worth it?  SOO isn't quite delivering 2x the returns over a four year period but its volatility and max drawdown is over 2x as high. From a risk-adjusted perspective, the plain vanilla VOO delivers a higher Sharpe Ratio and Treynor Ratio but its annualized alpha is lower. As with a lot of things with life, it all comes down to price. The fee of SOO is nearly 18x greater than VOO so investors need to really make sure that what the leveraged ETF is actually delivering makes sense in their portfolio.