Comparing the new SPYU to UPRO and SPXL

6 lug

I am not sure if anyone else noticed, because quite frankly I completely missed it, but there is a new leveraged share on the block that aims to track the S&P 500 (SPX). That ticker is SPYU.
Now this isn’t a conventional leveraged share. Most leveraged shares are between 2 x to 3 x max. However, this one is 4 x. Yeah, you read it correctly, 4 x the S&P. So if the S&P moves 2%, your theoretical gains are 8%.

Now there are inherent risks with leveraged share usage, which I have spoken about before. Now I am not going to get into the risks involved with over-leveraging yourself. I feel like there is enough cautionary tales, both from me and others, about such travesties. But what I want to cover in this post is really just an evaluation of SPYU vs the popular others, such as SPXL and UPRO. For me, my go to has always been UPRO; however, this new one intrigued me so decided to look at it a little more closely.

Overview

SPYU was launched in December of 2023. Surprisingly, despite being an ETF that tracks and American index and is listed on the NYSE, this leveraged ETF is managed by a Canadian institution, the Bank of Montreal. While it is a little strange to see the Bank of Montreal offering such an asset as an American asset, this bank is well known in Canada for offering multiple types of ETFs with exposure to both American and Canadian industries. I myself have many of their products and have been pleased with the returns!
Owning to SPYU’s short-ish existence, its difficult to really make long term predictions about how this will hold up over time. But I have done some comparative analysis on SPYU, UPRO and SPXL, using SPY as a benchmark, to see how SPYU has performed in its short timespan. So let’s get into the results.

Correlation:

Generally, the first thing you want to look at when identifying a leveraged share is the correlation. If a leveraged ETF tracks the underlying well, you are going to see a high correlation. If it struggles to track the underlying well, you will see a correlation with a lot of ‘variance’. Variance just means deviation from what would be, generally, a statistically strong relationship.

So let’s take a look at our 3 amigos in relation to SPY:



In the chart above, we are looking at the correlation of SPYU, UPRO and SPXL in relation to SPY over a rolling 14 period lag (in other words, a 14 day time period).

Purple represents UPRO, green SPXL and Aqua SPYU. In the legend on the right, you can see the max and min correlation of the various leveraged ETFs in relation to SPY. We see that UPRO and SPYU are pretty much on par with each other, with a correlation of roughly 0.97 to 0.98. This would equate to a variance of 0.04 (a perfect correlation has a score of 1, which would be the benchmark to compare the degree of variance or drift from the ability to track the underlying). This is, from a statistical perspective, fantastic! For most instances, we would say this is pretty much on par with a perfect correlation.

The same is technically true for SPXL. SPXL has a min correlation of 0.96, which equates to a variance of around 0.05, only 0.01% more than the other 2 ETFs. Statistically, these tickers are indistinguishable and there really is no statistically significant difference observed between their ability to track the underlying.

What about Slippage and Returns?

Slippage, which can be the result of contango and other factors, refers to a type of “loss in value” so to speak (AKA DECAY!!!). Essentially what it means is, is the ETF delivering what it says to deliver. In SPYU’s case, it says it delivers 4 x that of the S&P (or SPY). No leveraged ETF will ever be able to perfectly match their quoted returned consistently, owning to normal market volatility. However, what we want to see in a good leveraged share is very little slippage. In other words, we want to see a leveraged ETF that more frequently returns what it promises than doesn’t.

To measure this, we can use an indicator I developed a while ago called leveraged share decay tracker (tradingview.com/script/OOVmlS0h-Leveraged-Share-Decay-Tracker-SS/).

Let’s kick it off with SPY vs SPYU:



In this chart, we can see that over a short period of time (under 100 days), the average slippage of SPYU is around 2.4%. For the most part. We can see this quantified in variance (the difference in correlation) and drift (the monetary measure of variance). This means that, at approximately 100 days, the variance in the potential loss or gain is around $1.72. At 30 days, it is $0.25.

This means, theoretically, you could be down $1.72 per share, if you intended to hold for approximately 100 days. Now, this $1.72 could be meaningless if the ETF managed to offer around the quoted returns, and indeed, it seems that it does. At 100 days, the expected return would be 42.65%, based on SPY’s trajectory. The actual return was 31.88%. This is a 10.77% difference. Had you traded SPY directly, you would be up about 21%. So the 10% slippage kind of evens out in that sense, because you are still up more than 10% than the actual underlying itself.

But wait, we need to check how the other leveraged ETFs perform. Let’s look at UPRO and SPY next:



So, remember UPRO promises 3 x the leverage, so the returns will likely be less than the returns on SPYU, which offers 4 x the leverage. Looking at this, we can see the average % slippage is about 0.40%. The average monetary slippage is about 0.40$. And finally, if you held for 100 days, you would only have a slippage of around 3%. So had you invested in SPY in December of 2023 , your returns would have been about 21% and your returns on UPRO would have been about 28%.

And finally, let’s take a look at SPXL:



Remember, SPXL promises to deliver 3x the exposure to the S&P, similar to that of UPRO.

You can see it’s pretty identical to UPRO:



UPRO seems to drift a bit more than SPXL; however, the difference is not statistically significant. The $ amount is also equivalent, taking into account that SPXL is approximately 1.5 x the cost of UPRO.

Cointegration

And finally, the last way to visualize how effective leveraged shares are at tracking the underlying is by creating a co-integration regression. This uses the price of the leveraged share to predict the price of the underlying. A leveraged share with a good relationship will be on point in predicting the price of the underlying. One that struggles will have frequent drifts and deviations from the price of the underlying. Here is all 3 tickers, compared to SPY (SPY represented by the red dotted line):



From here, we can see qualitatively that SPXL tends to have more dramatic swings in both directions, then UPRO or SPYU. However, SPYU and UPRO tend to perform identically.
So what’s the verdict on SPYU and the Leveraged trio as a whole?

My go to for trading SPY has been UPRO. As I just recently learned about SPYU I plan to make the shift here. The results of these analysis show that, from a statistical standpoint, the differences are marginal and not significant.

If you want to nail it down to “which is the MOST significant within the significance” so to speak, the winners here can be grouped by desired outcome. Here they are:

Returns focus:

If its returns you want, its SPYU you should do. SPYU will deliver up and above the returns of UPRO or SPXL, even in light of the drift and slippage. Under 100 days, the slippage shouldn’t be objectively notable. It will only become apparent at the 100 day mark or longer; however, SPYU still manages to deliver returns that surpass both UPRO and SPXL at that time point.

Risk Management:

Risk management has to go to SPXL, for the lack of slippage associated over the longer term. While SPXL does have a little wider variance, it manages to have the lowest slippage in percent and money drift. SPXL frequently delivers on what it promises.

And that’s it folks! Hope you enjoyed!

Safe trades as always!