Leveraged ETFs and Financing Costs

I have been having this discussion about how much rising interest rates will change the ability of leveraged ETFs to track their target benchmarks etc. Below is a chart summarizing some of the results.

1. In blue we have a curve showing the actual ADJ closing prices for UPRO.
2. Green shows starting with the closing price of UPRO on the first day. Then follows the growth of the SPY ADJ close returns for each day multiplied by 3 with no additional costs subtracted.
3. Orange shows the same as green but includes a consistent fee that was needed for the period to have the orange curve end with the same ending price as UPRO ADJ actual. The annual fee needed was 2.46033450515858%
4. Black uses the same format but instead of the fee needed to match it uses 2 x the cost implied for leverage using futures prices and the current S&P 500 dividend.
5. Red uses 2X EFFR as the fee.
6. The interest rates and dividend rate of S&P 500 are also graphed for reference.

So far it seems as though for my purposes neither method shows a large difference in results except over long period of course. However, for the sake of backtesting during the ultra high interest rates the Fed reached in the 70s/80s a method such as the EFFR could be useful since the futures data doesn’t go back as far.

You can see the data I used here.

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