Author Topic: Curious about Leveraged ETFs  (Read 635 times)

GreenEggs

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Curious about Leveraged ETFs
« on: November 09, 2019, 07:56:08 AM »
All of my real money is invested in Vanguard index funds & real estate.  I'd like to try my hand at the market with a small portion of my portfolio, maybe 1-2%, for the education and excitement of it. 


So, I opened a Robbinhood account and deposited $500 to play with.  I've been reading and looking at lists, analysts ratings, etc.  I clicked on the top gainers tab and checked various time frames (day,week, month, YTD, 1,2,5 year) and was attracted to leveraged ETFs, specifically SOXL.


I understand a little about leveraged ETFs.  They are leveraged by the fund manager at 2X or 3X using options & futures (which I barely understand).  The individual investor isn't using margin as leverage, but the fund's gains or losses are compounded by the level of leverage used. 


I'm attracted to investing in sectors & funds because they spread the risk.  I figure as a newbie I'm pretty clueless about choosing individual stocks and understanding what to look at to evaluate them. 


What's the general view here about leveraged ETFs?

SeattleCPA

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Re: Curious about Leveraged ETFs
« Reply #1 on: November 09, 2019, 08:06:04 AM »
Sort of off topic, but do you know that you can simulate historical returns from leveraging using firecalc and cfiresim?

The "trick" is to set the bond percentage to a negative value. E.g., to model 75% leverage, set your stocks percentage to 400% and your bonds percent to -300%.

If you do this, what you'll see is this: When leverage works, it really works...

Here's the blog post I did about using firecalc and cfiresim for this: https://evergreensmallbusiness.com/portfolio-leverage-modeling-with-cfiresim-and-firecalc/

Caution: I think the best case historical "all leveraged up" scenarios are very unrealistic.

Final comment: This seems unnecessarily risky. I would personally never do it.

habanero

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Re: Curious about Leveraged ETFs
« Reply #2 on: November 09, 2019, 08:06:52 AM »
What's the general view here about leveraged ETFs?

That I stay away. Its not like if the underlying goes up by x you make 2 or 3 times x. You might end up making nothing in the end. You also magnify the downturns and if the underlying oscillates with in a range for example you are likely to loose a lot of money. They are fine for making a short-time leveraged bet on the direction of something but they are truly horrible as long-term investments as the inevitable downturns will kill your results. They amplify your returns if you get the direction correct on a short term-bet, but they also multiply your losses if you get it wrong. In the long term you are close to guaranteed to loose money due to market fluctuations.

This is the payout profile for a neutral a 2x and a 3x bull (the underlying can be whatever)

« Last Edit: November 09, 2019, 10:59:59 AM by habaneroNorway »

GreenEggs

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Re: Curious about Leveraged ETFs
« Reply #3 on: November 09, 2019, 10:35:38 AM »
From what I'm reading it seems that the charts for SOXL are flawed, showing impossible results.  I assume the charting programs don't account for the short term nature of leveraged ETFs, ignoring daily resets or maybe account wipes out when it swings into the negative.   


The Yahoo chart shows a 715% gain over 5 years, which isn't possible from what I'm understanding.