Hendrik Bessembinder - Constant Leverage & Measuring Investor Outcomes - The Rational Reminder Podcast Recap

Podcast: The Rational Reminder Podcast

Published: 2026-02-19

Duration: 1 hr 6 min

Summary

In this episode, Hendrik Bessembinder returns to discuss the implications of constant leverage ETFs and the measurement of investor outcomes. He highlights the complexities of leveraged products and introduces new metrics for evaluating investor returns, emphasizing the importance of understanding volatility and spending needs.

What Happened

Benjamin Felix and Cameron Passmore welcome back Hendrik Bessembinder, a well-regarded figure in the field of finance, to delve into his latest research on constant leverage ETFs and investor outcomes. They discuss Bessembinder's previous insights on individual stock returns and how they have evolved with the introduction of leveraged single-stock ETFs. Felix expresses skepticism about these products, pointing out that while they may have niche applications, they are generally unsuitable for most investors due to their high costs and risks.

Bessembinder elaborates on his research, particularly focusing on the concept of volatility decay in constant leverage ETFs. He explains that this phenomenon is often misunderstood, stressing that volatility plays a crucial role in determining outcomes. The discussion also touches on the stark underperformance of leveraged ETFs relative to simple benchmarks, highlighting that long and short leveraged ETFs underperform by significant margins when measured annually. The conversation shifts towards measuring investor outcomes, where Bessembinder introduces his new measures, such as the sustainable return, which aim to bridge the gap between financial planning and academic research, making the discussion highly relevant for practitioners and investors alike.

Key Insights

Key Questions Answered

What are constant leverage ETFs and their implications?

Bessembinder discusses constant leverage ETFs, particularly focusing on their applications for single stocks. He notes that while they can be used in very specific hedging scenarios, for most investors, they are likely to be poor choices due to their complexity and associated costs. The conversation emphasizes the need for investors to fully understand these products before engaging with them.

How do leveraged single-stock ETFs perform compared to benchmarks?

Bessembinder reveals that leveraged single-stock ETFs underperform relative to a simple frictionless leveraged benchmark by an average of 0.79% per month for long leveraged ETFs and 1% for short leveraged ETFs. This translates to more than nine percentage points annually, underscoring the significant costs involved and the challenges investors face in achieving their desired outcomes.

What is volatility decay and why is it important?

Volatility decay is a concept that Bessembinder addresses, explaining that it is often misunderstood. He points out that volatility has a dual role in determining investment outcomes, especially in the context of leveraged ETFs. Bessembinder emphasizes that investors must consider how volatility affects their compounding returns, particularly in real-time decision-making scenarios.

What new metrics for measuring investor returns are being proposed?

Bessembinder introduces new metrics such as the sustainable return, which aims to better reflect the realities of investor spending needs. He discusses how these measures can help align financial planning with academic finance research, making them more applicable and useful for both individual and institutional investors.

Why is understanding spending needs crucial for investors?

The discussion highlights that every investor has spending needs, which can significantly influence their investment strategies and outcomes. Bessembinder suggests that understanding how spending impacts return measurement is vital for creating effective investment plans. This perspective encourages a broader view of investment performance beyond mere returns.