Author Topic: leveraged ETF products - SPXL strategy, decay, slippage  (Read 804 times)

YoungStache

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leveraged ETF products - SPXL strategy, decay, slippage
« on: March 20, 2020, 05:26:00 PM »
Has anyone used or considered using leveraged ETF products, or have any insight for that matter?

Given the current market conditions, I am considering buying a sizeable SPXL position(3x SP500 bull) if the market drops a bit more (to lower my risk as much as possible).

I have plenty of VTSAX in my long term portfolio, and have harvested lots of tax-losses during this crash to offset potential short or long-term gains on SPXL. My job is 100% immune to any recession or coronavirus, or layoffs. I can continue to purchase VTSAX biweekly, or more SPXL if it continues to drop after the initial purchase.

Does anyone know much about the decay and slippage that people warn about when buying leveraged products? Are there any other leveraged products that could perform better?

Systems101

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #1 on: March 20, 2020, 10:42:45 PM »
Has anyone used or considered using leveraged ETF products, or have any insight for that matter?

Personally, I wouldn't consider it.  The leverage sword cuts both ways.  With leveraged ETFs, there are a lot of embedded risks that are not readily apparent if you only consider the name of the ETF, as the way they are actually creating the leverage has to do with futures.  You may want to read this thread: https://forum.mrmoneymustache.com/investor-alley/indexing-with-leverage/

Given the current market conditions, I am considering buying a sizeable SPXL position(3x SP500 bull) if the market drops a bit more (to lower my risk as much as possible).

What makes you think the market is a good investment if it "drops a bit more"?  Just because it's down 30%+ doesn't mean it's cheap on an absolute basis.  It *should* be about what you pay, not what you save (but marketing people have done a crazy-effective job on many people convincing them the discount matters on normal goods, so it's only natural people apply that to stocks)

Does anyone know much about the decay and slippage that people warn about when buying leveraged products? Are there any other leveraged products that could perform better?

One of the terms of art you are looking for is "ETF Contango".  This can eat a dramatic portion of your portfolio over time.  In some cases, 60% a year.  Go read @Financial.Velociraptor 's blog and read his stories about puts on UVXY to extract that value (before that ETF was changed).  Just googling "Financial Velociraptor" will get you there if you don't follow it from his posts in the thread above.

MustacheAndaHalf

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #2 on: March 20, 2020, 11:59:18 PM »
Were you aware several Oil Bull 3x ETFs have been shut down owing to excessive losses?

Still, if you're going to buy an S&P 500 bull 3x ETF, waiting for markets to be down -30% YTD is pretty good timing.

economist

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #3 on: March 21, 2020, 06:16:01 AM »
If you want math, try this paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344133

The TL;DR, if I understand it, is that volatility drag (-10%, then +10%, does not result in a 0% overall return) gets worse with more leverage,proportional  to the leverage squared, so a 2X ETF has 4X the penalty from volatility drag, and a 3X ETF has 9X the penalty. However, over timeframes of roughly one year or so, their is not too much tracking error.

With the absolutely insane moves we've had in the market lately, I would imagine the volatility drag has been worse than normal. Another option to consider is long-term, deep in the money call options. You can buy Dec 2022 SPY Calls with a Strike Price of 140, for example, for around $99 per share ($9,900 per contract). If SPY returned to it's high of about $340 by Dec 2022, you'd have about a 100% return.

I'm eyeing that, but have not made a move yet. I just started a new job and am hoping to get a better feel for how secure I am before doing anything crazy.

hodedofome

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #4 on: March 21, 2020, 10:14:19 AM »
Contango is an issue with volatility ETFs, commodity ETFs and the like. Itís not much of an issue with stock index and bond ETFs. You can look at the performance of 3x stock index ETFs and its pretty much in line with 3x the return of the index minus fees. I have some in retirement accounts, and itís performed as expected both up and down times.

effigy98

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #5 on: March 21, 2020, 12:24:37 PM »
I'm buying sqqq on up days and selling on down days. The fed is making this very profitable. Make sure to use limit orders. One day this will stop working so only risk a small fraction of total portfolio. I think this is safer then options in case they close the market don't have to worry about expire dates.

Sent from my Pixel 3a using Tapatalk
« Last Edit: March 21, 2020, 12:26:58 PM by effigy98 »

ChpBstrd

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #6 on: February 08, 2021, 10:14:20 AM »
Resurrection!
Did any of you get into levered ETFs (long or short?)?

MustacheAndaHalf

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Re: leveraged ETF products - SPXL strategy, decay, slippage
« Reply #7 on: February 08, 2021, 11:47:30 AM »
OP may be inactive, but Direxion 3x S&P500 (SPXL) opened at $23 on March 20, and closed at $19/sh.  The return since then was +250% to +320%, with SPXL now at $80.45/sh.

I opened an Interactive Brokers (IBKR) account in order to buy leveraged ETFs, like 2x oil & gas ETF (GUSH).  It has more than tripled since my earlier post in this thread, but I bought it later.  More recently, it's 6 month performance is +55%.

One point I would have agreed with 10 months ago, but not now, is that leveraged ETFs ignore volatility drag.  A great example is GUSH, which aims for a return of 2x XOP.  In the past 6 months, GUSH (+55.24%) didn't achieve 2x of XOP (+32.19%).  But wait!  Over 3 months, GUSH (+165.46%) beats it's multiple of 2x XOP (+80.19%).  One time frame has volatility drag, another overlapping time frame shows it's gone.  I think leveraged ETFs are aware of volatility drag and take steps to mitigate it.