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Sep 15, 2020 at 17:22 comment added Daneel Olivaw @will sorry for the late reply, I must have missed the warning. My usage of “non-linearity” might be an abuse of language here indeed, plain “path-dependency” is more appropriate.
Sep 15, 2020 at 16:09 comment added user49866 @will this is a really interesting argument, thank you for sharing this.
Sep 8, 2020 at 21:01 comment added will The ETF is linear at any given point in time, but it rebalances, making it path dependent. You could think of another situation where SPX holds a portfolio of stocks, P, from a universe of stocks, U - it is possible that all of the stocks in U start and end at the same level, but through rebalances, SPX ends at a different level from its initial level - would you call SPX non linear?
Sep 8, 2020 at 15:10 comment added Daneel Olivaw The way I see it, the end value of the leveraged/inverse ETF depends on realized volatility, hence I see this as non-linearity.
Sep 8, 2020 at 15:04 comment added Daneel Olivaw @will I am not sure what you mean. For example, if you trade an inverse ETF in which you buy on January 1st and sell on December 31st, assuming the underlying closes the year at the same level than it started, the corresponding ETF will close lower than it started (ignoring fees etc.). I think this is a pretty acknowledged fact and for me this means that the ETF is not linear. What do you mean by "the product is always linear"?
Sep 8, 2020 at 3:39 comment added JoshK I was going to write the exact same thing. The products are 100% linear until the last second when the rebalance is complete. The amount that the fund manager needs to trade to rebalance moves around, but that's not related at all to the exposure of the fund.
Sep 6, 2020 at 13:45 comment added will the product is always linear though, which means that there should be no decay associated with a convexity.
Sep 5, 2020 at 15:24 comment added Daneel Olivaw For the holder of the ETF, it is linear over a daily period, but for longer periods it is no longer linear to the holder. The rebalancing process you describe is from the point of view of the sponsor/hedger of the ETF, not the investor holding stakes.
Sep 5, 2020 at 14:26 history answered will CC BY-SA 4.0