Portfolio Diversification Effect of S&P 500 Leveraged ETFs

This study examines the diversification benefits of leveraged ETFs, focusing on the ProShares Ultra S&P 500 Index ETF (SSO). Using mean-variance spanning tests and Sharpe ratio analysis, the findings reveal that incorporating SSO significantly expands the efficient frontier, particularly for global minimum variance portfolios. The optimal portfolio weights suggest that a −1:2 ratio between SSO and SPY often creates a position akin to a risk-free asset. This configuration reduces systematic risk while enjoying the gains from mitigating “volatility drag” through shorting SSO, resulting in enhanced risk-adjusted returns. Overall, this research provides empirical evidence supporting leveraged ETFs as valuable tools for portfolio diversification.