The Costs of Synthetic Leverage in Single-Stock Leveraged ETFs: Theory and Evidence
Publication Date
10-13-2026
Abstract
We study single-stock leveraged ETFs, which obtain leverage through total-return swaps (TRSs). We focus on what we term Excess Financing Costs (EFCs), which differ from those implied by canonical models because (i) swap counterparties charge a spread over the floating benchmark rate, (ii) the funds hold little or no underlying stock, so swap interest rates apply to a larger financing base, and (iii) unrealized swap gains or losses imply variation through time in equity exposure relative to the financing base. For the full sample EFCs average 6.2% annualized, rising to 7.3% by the final quarter (several times larger than disclosed expense ratios) and are fully passed through to investors. We also show that fund managers partially mitigate these costs by selectively closing swaps with higher financing bases per dollar of equity exposure. ETFs with lower EFCs earn returns that are about 1.43% per year higher than high-EFC funds tracking the same stock.
Document Type
Article
Keywords
Leveraged ETFs, Total-Return Swaps, Financial Intermediation, Synthetic Leverage, Form N-PORT
Disciplines
Finance
Language
English
