Single-stock leveraged ETFs bleed value daily through swap financing costs. This paper constructs a market-neutral carry trade to capture that bleed, presenting results both with and without a one-off December 2025 volatility event that materially distorts the headline figures.
A 2x leveraged ETF promises exactly twice the daily return of its underlying. In practice it consistently delivers less. This gap (the tracking error) is not random noise. It is a structural, predetermined daily deduction built into the product’s swap mechanics, and it accrues to the short seller unconditionally regardless of market direction.
AVL, the T-Rex 2x Broadcom ETF, achieves its 2x exposure through a total return swap. The counterparty delivers 2x AVGO’s daily return but charges a financing rate comprising the risk-free rate plus a spread for the difficulty of hedging a single-stock position. This cost is deducted from NAV every trading day, silently, whether AVGO rises or falls.
The position is structured as $10,000 long AVGO / $5,000 short AVL, rebalanced daily to maintain delta neutrality. The gross spread (observed tracking error of 23.12% minus borrow cost of 0.6%) is the return available before friction.
Before the numbers: one month distorted everything, and presenting results without flagging it first would be dishonest. December 2025 contributed $2,157 of the strategy’s total $3,149 P&L, representing 68% of all profit from a single month out of 18. Any unqualified presentation of headline returns would be misleading without this disclosure.
All results in this paper are presented on two bases: full sample (including December) and adjusted (December P&L replaced with a structural-TE-only estimate). The adjusted figures are the author’s preferred basis for evaluating forward-looking merit.
The backtest runs from AVL’s inception (October 10, 2024) through March 13, 2026 across six distinct market regimes. Position: $10,000 long AVGO, $5,000 short AVL, 0.6% annual borrow, rebalanced daily.
| Metric | Full sample | Adjusted (excl. Dec windfall) | Weekly rebal (full) |
|---|---|---|---|
| Total return | +31.49% | +13.39% | +50.07% |
| CAGR | +21.45% | +15.96% | +33.40% |
| SPY CAGR (same period) | +9.93% | +9.93% | +9.93% |
| Sharpe ratio | 1.28 | 1.33 | 1.50 |
| Calmar ratio | 22.06 | 16.45 | 5.38 |
| Max drawdown | -0.97% | -0.97% | -6.21% |
| Beta vs SPY | 0.042 | 0.042 | 0.222 |
| Win rate | 60.3% | 60.3% | 55.5% |
| Win / loss ratio | 1.95x | 1.95x | 1.33x |
The strategy was profitable in all six regimes encountered. The daily P&L correlation with AVGO’s return was 0.002, confirming that market direction does not determine the sign of returns.
| Event | AVGO return | Strategy P&L | Classification |
|---|---|---|---|
| AVGO bull run (Oct–Dec 2024) | +27.7% | +$115 | Normal carry |
| DeepSeek crash (Jan 2025) | -6.4% | +$42 | Normal carry |
| Liberation Day (Apr 2025) | +7.6% | +$39 | Normal carry |
| AVGO earnings spike (Sep 2025) | +22.1% | +$48 | Normal carry |
| December 2025 selloff | -17.6% | +$2,157 | Vol decay event (not repeatable) |
| 2026 YTD (to Mar 13) | -7.3% | +$195 | Normal carry |
The primary risk is a prolonged unidirectional move in AVGO. Between daily rebalances the position drifts out of its 2:1 hedge ratio. Synthetic stress tests show the worst case: a +1.5%/day move over 20 consecutive days produces approximately a -4% loss on capital. This risk is symmetric, as sustained down moves also hurt through the same drift mechanism.
The 0.6% borrow cost estimate reflects current market conditions and is not fixed. Borrow costs for single-stock ETFs can spike when the underlying moves strongly, potentially forcing closure at an inopportune time. This should be monitored daily through your prime broker.
AVL launched in October 2024, giving this backtest only 17 months of live data. The sample does not include a prolonged bear market or rising-rate environment. The structural tracking error argument is robust, but its specific magnitude in different regimes remains untested.
On the adjusted basis (stripping the December volatility windfall), this strategy produced a CAGR of approximately 15.96% at near-zero market beta and a maximum drawdown under 1%. That is a genuinely attractive risk-adjusted profile, and it rests on a structural argument that is observable and persistent across all 17 months of available data.
The full-sample CAGR of 21.45% is accurate but misleading as a forward-looking estimate. The author’s view is that the honest expected return is in the range of 11–16% annually: the lower bound representing conservative structural carry, the upper bound allowing for occasional volatility decay events. Investors should base any allocation decision on the adjusted figures presented here, not the headline number.