Author Topic: Triple-Leverage ETF  (Read 18600 times)

shitzmagee

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Triple-Leverage ETF
« on: October 29, 2014, 05:35:35 AM »
Looking for other's thoughts on including a triple-leverage ETF like UPRO as 1/3 or your stock portfolio.

So zoom into just the stock portion of your portfolio. What do you think about keeping 1/3 of your holdings in a triple-leverage ETF that seeks to match 3x S&P? Out of only that 1/3 of your holdings, you'd be getting the same price action as if 100% of your holdings were in SPY with only 1/3 of your portfolio at risk. Then with the other 2/3 of holdings you can invest in stable dividend aristocrats.

Over that long term, if the market returns an average of 7% per year then you would be getting 7% (21% * 1/3) just out of your triple-leverage ETF and then add in all your dividends from the other 2/3 of your holdings.

In a bad year(s), that same triple-leverage ETF will cause you're portfolio to drop the same percentage as the market, but you'd still get all your dividends from the other 2/3 of your holdings.

Thoughts?

bo_knows

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Re: Triple-Leverage ETF
« Reply #1 on: October 29, 2014, 05:47:41 AM »
Be careful with your assumptions of leveraged index funds or ETFs.  These leveraged funds are meant to get 2-3x an index for any particular day, not long term.  Long-term, because of the volatility added, you can really lose your shirt.

Check out the simplified example here: http://etfdb.com/2009/the-truth-about-3x-etfs-and-long-term-investing-or-dont-use-a-toaster-to-cook-a-turkey/  and read a little more about the long-term returns of these leveraged funds.

hodedofome

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Re: Triple-Leverage ETF
« Reply #2 on: October 29, 2014, 09:57:06 AM »
Most likely a better implementation would be for you to buy one of the enhanced index funds. They buy index futures for leverage and then hold a bond fund on top of that.

electriceagle

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Re: Triple-Leverage ETF
« Reply #3 on: October 29, 2014, 10:12:59 AM »
Leveraged ETFs often suffer from contango (look it up). Basically, they incur large internal transaction costs whenever there is volatility.

If the underlying index goes up, you do very well
If the underlying index goes down, you're sunk
If the underlying index goes up-down-up-down, you're sunk -- even if the net overall movement is up!

arebelspy

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Re: Triple-Leverage ETF
« Reply #4 on: October 29, 2014, 10:44:02 AM »
Agreed with the previous posters - decay will kill you if you hold these.  They're for short term trading, not long term leverage.
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zb3

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Re: Triple-Leverage ETF
« Reply #5 on: October 29, 2014, 04:12:43 PM »
You will be okay using them if you rebalance regularly.

A x3 ETF as the above posters have said seeks to replicate x3 the index returns for one day only.  If the market goes straight up you do well, if it goes straight down you do well as a multiple of a non leveraged portfolio: i.e.:

Market goes down 5 on day 1 and down 5% on day 2, your x3 ETF goes down 15% and 15%, this is only a 27.75% loss (less than x3 the non leveraged portfolios loss of 9.75%).

However if the market goes sideways, volatility will decay your returns.  In order for the leveraged ETF to keep the same level of leverage EVERYDAY, it needs to sell as the market drops and buy as the market rises.  To counteract this, you can hold say 50% SSO and 50% BND, when the market drops you will have less SSO relative to BND, so you buy more SSO.  EG:




As you can see you outperform SPY even in a choppy year like 2011.  SSO is a x2 ETF, you could get the same effect with a x3 ETF i.e. UPRO


Check out the last few pages of this thread:  http://www.bogleheads.org/forum/viewtopic.php?f=10&t=143037&newpost=2241070

There are some very smart people in there who have discussed it and posted very useful links.

shitzmagee

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Re: Triple-Leverage ETF
« Reply #6 on: October 29, 2014, 04:17:19 PM »
Thanks for the info everyone. Very interesting effects during a flat market that I didn't realize.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #7 on: November 10, 2014, 06:09:24 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

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Re: Triple-Leverage ETF
« Reply #8 on: November 10, 2014, 06:58:44 PM »
Instead of investing in things you do not understand why not just invest in a 3 fund, low fee index fund portfolio and be done with it? 

You know greed is one of the deadly sins right?  ;)
« Last Edit: November 10, 2014, 07:00:29 PM by surfhb »

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #9 on: November 10, 2014, 07:04:34 PM »
Instead of investing in things you do not understand why not just invest in a 3 fund, low fee index fund portfolio and be done with it? 

You know greed is one of the deadly sins right?  ;)

Thats what I currently do. Exploring other possibilities and learning about the market is fun to me though :)

zb3

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Re: Triple-Leverage ETF
« Reply #10 on: November 10, 2014, 07:22:49 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

That link you posted gives the returns without rebalancing.  In that scenario the return is marginally better but with much higher volatility.

Example:




As you can see, from when SSO first came out until now, you only slightly beat the index but with double the volatility.  A far better option is to rebalance, then you can get double the returns but also face double the volatility.  In order to get double returns you would need to rebalance daily, in order to counteract the LEFTs rebalancing.  This results in excessive transaction costs and tax implications.

Instead, you can rebalance SSO yearly to a notional value of SPY, this won't quite result in performance x2 the index, but it will be close.  In a trending market SSO actually performs better than SPY, volatility decay only occurs during choppy markets.
« Last Edit: November 10, 2014, 07:24:26 PM by zb3 »

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #11 on: November 10, 2014, 07:37:24 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

That link you posted gives the returns without rebalancing.  In that scenario the return is marginally better but with much higher volatility.

Example:




As you can see, from when SSO first came out until now, you only slightly beat the index but with double the volatility.  A far better option is to rebalance, then you can get double the returns but also face double the volatility.  In order to get double returns you would need to rebalance daily, in order to counteract the LEFTs rebalancing.  This results in excessive transaction costs and tax implications.

Instead, you can rebalance SSO yearly to a notional value of SPY, this won't quite result in performance x2 the index, but it will be close.  In a trending market SSO actually performs better than SPY, volatility decay only occurs during choppy markets.

Yes, but assuming leveraged etfs are here to stay, this performance of SSO is during one of the most volatile markets ever. If you applied the same methodology and applied it to every 10 year period of the S&P 500 (without a tracking error), you would find that it is much more successful and chances, based on previous prices and volatility, show that if you hold SSO for 10 years, you have a pretty good chance of beating the index (my calculations say around ~80% I believe) and if you hold for 20+ years, you have a 100% chance of beating the index. Again, my disclaimer here is that this analysis was all based on previous S&P 500 prices and does not guarantee any future prices and probability. Obviously there is no such thing as a 100% guarantee in the stock market, but your chances would be very very high. I did my analysis similar to that of FireCalc where i took every 10 year, 15 year, 20 year time frames that were available and calculated if it would be the underlying index, the S&P 500. If you would like to see my analysis, you may. I just don't know the best way to upload an excel spreadsheet to these forums.

hodedofome

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Re: Triple-Leverage ETF
« Reply #12 on: November 10, 2014, 07:38:51 PM »
Why don't you just buy the e-mini S&P 500 in whatever leverage you want and be done with it.

Or the enhanced index funds like I posted about earlier. I feel like I'm the only one here that knows about them...

zb3

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Re: Triple-Leverage ETF
« Reply #13 on: November 10, 2014, 07:45:59 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

That link you posted gives the returns without rebalancing.  In that scenario the return is marginally better but with much higher volatility.

Example:




As you can see, from when SSO first came out until now, you only slightly beat the index but with double the volatility.  A far better option is to rebalance, then you can get double the returns but also face double the volatility.  In order to get double returns you would need to rebalance daily, in order to counteract the LEFTs rebalancing.  This results in excessive transaction costs and tax implications.

Instead, you can rebalance SSO yearly to a notional value of SPY, this won't quite result in performance x2 the index, but it will be close.  In a trending market SSO actually performs better than SPY, volatility decay only occurs during choppy markets.

Yes, but assuming leveraged etfs are here to stay, this performance of SSO is during one of the most volatile markets ever. If you applied the same methodology and applied it to every 10 year period of the S&P 500 (without a tracking error), you would find that it is much more successful and chances, based on previous prices and volatility, show that if you hold SSO for 10 years, you have a pretty good chance of beating the index (my calculations say around ~80% I believe) and if you hold for 20+ years, you have a 100% chance of beating the index. Again, my disclaimer here is that this analysis was all based on previous S&P 500 prices and does not guarantee any future prices and probability. Obviously there is no such thing as a 100% guarantee in the stock market, but your chances would be very very high. I did my analysis similar to that of FireCalc where i took every 10 year, 15 year, 20 year time frames that were available and calculated if it would be the underlying index, the S&P 500. If you would like to see my analysis, you may. I just don't know the best way to upload an excel spreadsheet to these forums.

Yes you beat it.  But what you fail to understand is that you will beat the index by far more if you just rebalance once a year.  Why hold a leveraged ETF to beat the market on average about 1% a year but incur double the volatility, when you can rebalance yearly and get returns close to double the index?

zb3

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Re: Triple-Leverage ETF
« Reply #14 on: November 10, 2014, 07:48:57 PM »
Why don't you just buy the e-mini S&P 500 in whatever leverage you want and be done with it.

Or the enhanced index funds like I posted about earlier. I feel like I'm the only one here that knows about them...

Eminis are better for most Americans due to the lower implied interest rate.  LEFTs are better for me due to tax reasons.  The only other thing with futures is that you face margin call risk.  Futures trade almost 24/7 bar weekends, if you can't respond to a margin call fast enough you will be stopped out.  The market could then have risen substantially before you can buy another contract.  I suppose you could say that a LEFT is essentially issuing margin calls everyday the market is dropping due to its deleveraging, but at least you won't be removed entirely from the market.  The other problem with futures is the contract sizes, but overall I agree futures are better for most people due to lower implied interest rates.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #15 on: November 10, 2014, 08:20:33 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

That link you posted gives the returns without rebalancing.  In that scenario the return is marginally better but with much higher volatility.

Example:




As you can see, from when SSO first came out until now, you only slightly beat the index but with double the volatility.  A far better option is to rebalance, then you can get double the returns but also face double the volatility.  In order to get double returns you would need to rebalance daily, in order to counteract the LEFTs rebalancing.  This results in excessive transaction costs and tax implications.

Instead, you can rebalance SSO yearly to a notional value of SPY, this won't quite result in performance x2 the index, but it will be close.  In a trending market SSO actually performs better than SPY, volatility decay only occurs during choppy markets.

Yes, but assuming leveraged etfs are here to stay, this performance of SSO is during one of the most volatile markets ever. If you applied the same methodology and applied it to every 10 year period of the S&P 500 (without a tracking error), you would find that it is much more successful and chances, based on previous prices and volatility, show that if you hold SSO for 10 years, you have a pretty good chance of beating the index (my calculations say around ~80% I believe) and if you hold for 20+ years, you have a 100% chance of beating the index. Again, my disclaimer here is that this analysis was all based on previous S&P 500 prices and does not guarantee any future prices and probability. Obviously there is no such thing as a 100% guarantee in the stock market, but your chances would be very very high. I did my analysis similar to that of FireCalc where i took every 10 year, 15 year, 20 year time frames that were available and calculated if it would be the underlying index, the S&P 500. If you would like to see my analysis, you may. I just don't know the best way to upload an excel spreadsheet to these forums.

Yes you beat it.  But what you fail to understand is that you will beat the index by far more if you just rebalance once a year.  Why hold a leveraged ETF to beat the market on average about 1% a year but incur double the volatility, when you can rebalance yearly and get returns close to double the index?

I agree with your logic in your scenario, but I fail to see how this particular case is "average". Based on my calculations, for any given 10 year period of the S&P 500 and including a 1% annual fund fee, a 2x leveraged etf, similar to SSO would on median do about 1.888 times better than the index and chances of doing better of equal to the index is 79.58%. If held for any given 20 year period, the median performance is 2.998 times the index and probability of doing better than the index is 100%. For 25 years, median performance goes up even more.

I have attached my spreadsheet analysis if you care to know where and how I get my numbers. Just change the number under multiplier to 2 instead of 3. If you do take a peek, please let me know if there are any errors.

zb3

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Re: Triple-Leverage ETF
« Reply #16 on: November 10, 2014, 08:50:09 PM »
I have been researching leveraged etfs extensively lately and I am having trouble seeing the "catch". All I have determined is that, yes, they are more risky, but the return is higher, similar to any other investment we consider. If your time frame is long enough, these funds should come out well, well, well ahead.

Yes, I understand the term volatility drag, but, to me, this argument seemed invalid to me right off the bat. Initially I thought if leverages >1 returns worse returns due to "volatility drag", does leverages <1 mean better returns due to less "volatility drag"? Does this me if we leverage the S&P 500 less (lets say our by 0.5) we achieve high returns? Obviously not. We just see that the investment is safer. The article below is the only one that I can find that lays the math out clearly and I have done my own analysis on the S&P 500 using Yahoo!'s daily prices since 1950 and I have determined the long you hold them (leveraged etfs) the more likely you are to beat returns of just the index.

http://ddnum.com/articles/leveragedETFs.php

Someone please, please, please enlighten me. I know there is something I am probably missing. I just do not know what. I am truly curious whether this is a risk/return thing or they are truly too good to be true.

Also, in my post here, I am only trying to dismiss (or rather understand) the idea of "volatility drag". I made no note on tax implications and other things that cut into returns. Please share so I can be learned up. Thanks :)

That link you posted gives the returns without rebalancing.  In that scenario the return is marginally better but with much higher volatility.

Example:




As you can see, from when SSO first came out until now, you only slightly beat the index but with double the volatility.  A far better option is to rebalance, then you can get double the returns but also face double the volatility.  In order to get double returns you would need to rebalance daily, in order to counteract the LEFTs rebalancing.  This results in excessive transaction costs and tax implications.

Instead, you can rebalance SSO yearly to a notional value of SPY, this won't quite result in performance x2 the index, but it will be close.  In a trending market SSO actually performs better than SPY, volatility decay only occurs during choppy markets.

Yes, but assuming leveraged etfs are here to stay, this performance of SSO is during one of the most volatile markets ever. If you applied the same methodology and applied it to every 10 year period of the S&P 500 (without a tracking error), you would find that it is much more successful and chances, based on previous prices and volatility, show that if you hold SSO for 10 years, you have a pretty good chance of beating the index (my calculations say around ~80% I believe) and if you hold for 20+ years, you have a 100% chance of beating the index. Again, my disclaimer here is that this analysis was all based on previous S&P 500 prices and does not guarantee any future prices and probability. Obviously there is no such thing as a 100% guarantee in the stock market, but your chances would be very very high. I did my analysis similar to that of FireCalc where i took every 10 year, 15 year, 20 year time frames that were available and calculated if it would be the underlying index, the S&P 500. If you would like to see my analysis, you may. I just don't know the best way to upload an excel spreadsheet to these forums.

Yes you beat it.  But what you fail to understand is that you will beat the index by far more if you just rebalance once a year.  Why hold a leveraged ETF to beat the market on average about 1% a year but incur double the volatility, when you can rebalance yearly and get returns close to double the index?

I agree with your logic in your scenario, but I fail to see how this particular case is "average". Based on my calculations, for any given 10 year period of the S&P 500 and including a 1% annual fund fee, a 2x leveraged etf, similar to SSO would on median do about 1.888 times better than the index and chances of doing better of equal to the index is 79.58%. If held for any given 20 year period, the median performance is 2.998 times the index and probability of doing better than the index is 100%. For 25 years, median performance goes up even more.

I have attached my spreadsheet analysis if you care to know where and how I get my numbers. Just change the number under multiplier to 2 instead of 3. If you do take a peek, please let me know if there are any errors.

Your spreadsheet was a little hard to follow, although I commend you on the amount of effort it would have taken.  If you look at the link you posted above, the CAGR from 1885 to 2009 was actually worse with x3 leverage than it was with x1.  Also your calculations only include capital returns, not dividends.  If you were to rebalance you would get higher returns and also dramatically reduce your risk (although depending on your tax laws, rebalancing may not be too good for you).  With a x3 leveraged ETF you need to rebalance more than yearly, but for a x2 leveraged ETF, yearly rebalancing tracks quite well.

Here's an example:



The above table assumes you started in the beginning of 2008 and put 10k into SSO (x2 LETF).  The comparison to SPY is for rebalancing only - you don't put any money into SPY.  The balance on the far right is the balance at year end had you held SPY.  You then rebalance to that balance for the next year.  Ie at the end of 2008 you needed to add 3110 into SSO to achieve the notional SPY balance.  In 2009 you have excess, so you sell some SSO and put it into bonds.  Aside from having to contribute 3110 to the SSO fund at the end of 2008, at the end of 2009, you have 1321 above what is required to be put into bonds, at the end of the 2014 YTD return period you'd have 8,652 in total in bonds --> a net of 5,542 once you remove the contribution required in 2008. Over time this should only get larger (unless we have another huge financial crisis). Even assuming another large financial crisis, you'd still end up ahead. Ie assume in 2015 we have a financial crisis of the magnitude felt in 2008. SPY would fall from 15919 to 10,061. SSO would fall from 15919 to 5,110 (but you still have a net 5,542 in bonds not including the compounded return on them, allowing you to bring your allocation up to 10,061 for the start of 2016 and still have 591 left in your bond fund). The only way this strategy could fail is if we had a prolonged bear market. If this were to occur it wouldn't be a big deal, as the strategy is to only employ this leverage while young, so in nominal terms you would have lost nothing compared to the 50 year old with a 2 million portfolio of 60/40.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #17 on: November 10, 2014, 09:58:03 PM »

Your spreadsheet was a little hard to follow, although I commend you on the amount of effort it would have taken.  If you look at the link you posted above, the CAGR from 1885 to 2009 was actually worse with x3 leverage than it was with x1.  Also your calculations only include capital returns, not dividends.  If you were to rebalance you would get higher returns and also dramatically reduce your risk (although depending on your tax laws, rebalancing may not be too good for you).  With a x3 leveraged ETF you need to rebalance more than yearly, but for a x2 leveraged ETF, yearly rebalancing tracks quite well.


How did you calculate a CAGR for x3 lever less than x1 lever? My spreadsheet only runs from 1950, not 1885. Also, if you do a product of Col J (x1 lever) and Col K (x2 lever), you will see that Product of Col K is much greater than Product of Col J. I am having a hard time seeing what you are seeing.



Here's an example:



The above table assumes you started in the beginning of 2008 and put 10k into SSO (x2 LETF).  The comparison to SPY is for rebalancing only - you don't put any money into SPY.  The balance on the far right is the balance at year end had you held SPY.  You then rebalance to that balance for the next year.  Ie at the end of 2008 you needed to add 3110 into SSO to achieve the notional SPY balance.  In 2009 you have excess, so you sell some SSO and put it into bonds.  Aside from having to contribute 3110 to the SSO fund at the end of 2008, at the end of 2009, you have 1321 above what is required to be put into bonds, at the end of the 2014 YTD return period you'd have 8,652 in total in bonds --> a net of 5,542 once you remove the contribution required in 2008. Over time this should only get larger (unless we have another huge financial crisis). Even assuming another large financial crisis, you'd still end up ahead. Ie assume in 2015 we have a financial crisis of the magnitude felt in 2008. SPY would fall from 15919 to 10,061. SSO would fall from 15919 to 5,110 (but you still have a net 5,542 in bonds not including the compounded return on them, allowing you to bring your allocation up to 10,061 for the start of 2016 and still have 591 left in your bond fund). The only way this strategy could fail is if we had a prolonged bear market. If this were to occur it wouldn't be a big deal, as the strategy is to only employ this leverage while young, so in nominal terms you would have lost nothing compared to the 50 year old with a 2 million portfolio of 60/40.

As far as rebalancing goes, this idea I haven't explored yet. My original post was to compare x1 leveraged funds (indexes) to that of x2 and x3. The way I understand it, rebalancing is a way to mitigate risk at the expense of returns. For me, my risk tolerance is extremely great (I'm 21 yo) so I'm willing to not rebalance and just stomach the large swings until FIRE years.

zb3

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Re: Triple-Leverage ETF
« Reply #18 on: November 10, 2014, 10:29:34 PM »
As far as rebalancing goes, this idea I haven't explored yet. My original post was to compare x1 leveraged funds (indexes) to that of x2 and x3. The way I understand it, rebalancing is a way to mitigate risk at the expense of returns. For me, my risk tolerance is extremely great (I'm 21 yo) so I'm willing to not rebalance and just stomach the large swings until FIRE years.

Rebalancing in this instance increases returns and reduces risk.  Unbalanced SSO over the same period would have returned almost the same as SPY.  If you don't rebalance, volatility will decay your returns over time.  In choppy markets volatility decay can be extreme, esp for x3 LEFTs.  For example in 2011 UPRO returned - 11.9% whereas SPY returned positive 1.9%.  Had you rebalanced UPRO quarterly, you'd have only lost 0.55% (still 2.45% below SPY - although 2011 was a terrible year), not 11.9%.

pbkmaine

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Re: Triple-Leverage ETF
« Reply #19 on: November 10, 2014, 10:40:37 PM »
 Please Google "Long Term Capital Management" to see what the use of leverage did to the portfolios of some of the smartest people on the planet.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #20 on: November 10, 2014, 10:45:47 PM »
As far as rebalancing goes, this idea I haven't explored yet. My original post was to compare x1 leveraged funds (indexes) to that of x2 and x3. The way I understand it, rebalancing is a way to mitigate risk at the expense of returns. For me, my risk tolerance is extremely great (I'm 21 yo) so I'm willing to not rebalance and just stomach the large swings until FIRE years.

Rebalancing in this instance increases returns and reduces risk.  Unbalanced SSO over the same period would have returned almost the same as SPY.  If you don't rebalance, volatility will decay your returns over time.  In choppy markets volatility decay can be extreme, esp for x3 LEFTs.  For example in 2011 UPRO returned - 11.9% whereas SPY returned positive 1.9%.  Had you rebalanced UPRO quarterly, you'd have only lost 0.55% (still 2.45% below SPY - although 2011 was a terrible year), not 11.9%.

I agree with you in these specific cases, but these are just that, specific cases. The historical market hasn't continued to be that volatile, so why would I expect that. And if I do expect the future market to be that volatile/pessimistic, then i got bigger issues than figuring out whether leveraged etfs are a good investment.

What I was trying to illustrate in my spreadsheet is something similar to a Trinity Study in that we examine all possible market conditions (returns and volatility) and we examine the performance of these leveraged funds over every 10 yr, 15 yr, whatever yr period. If you examine my spreadsheet closer, you see the longer you hold these, the more likely you will outperform the x1 leveraged based on previous market conditions.

So in turn, i can only agree with your statement of "If you don't rebalance, volatility will decay your returns over time." for etfs with leverage of greater than 5. Otherwise you come out ahead if held long enough due to long term slight bull nature of the market.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #21 on: November 10, 2014, 11:00:40 PM »
Please Google "Long Term Capital Management" to see what the use of leverage did to the portfolios of some of the smartest people on the planet.

I would agree leverage adds to the risk, but I would say that the situation you noted above had other factors involved (a couple foreign financial crises) as well as a very different investing strategy (which from my extremely limited knowledge of it seemed to be exploiting the differences in bond prices). I am probably reading past your message, but you can't possibly be generalizing leverage as bad, could you?

zb3

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Re: Triple-Leverage ETF
« Reply #22 on: November 10, 2014, 11:01:47 PM »
As far as rebalancing goes, this idea I haven't explored yet. My original post was to compare x1 leveraged funds (indexes) to that of x2 and x3. The way I understand it, rebalancing is a way to mitigate risk at the expense of returns. For me, my risk tolerance is extremely great (I'm 21 yo) so I'm willing to not rebalance and just stomach the large swings until FIRE years.

Rebalancing in this instance increases returns and reduces risk.  Unbalanced SSO over the same period would have returned almost the same as SPY.  If you don't rebalance, volatility will decay your returns over time.  In choppy markets volatility decay can be extreme, esp for x3 LEFTs.  For example in 2011 UPRO returned - 11.9% whereas SPY returned positive 1.9%.  Had you rebalanced UPRO quarterly, you'd have only lost 0.55% (still 2.45% below SPY - although 2011 was a terrible year), not 11.9%.

I agree with you in these specific cases, but these are just that, specific cases. The historical market hasn't continued to be that volatile, so why would I expect that. And if I do expect the future market to be that volatile/pessimistic, then i got bigger issues than figuring out whether leveraged etfs are a good investment.

What I was trying to illustrate in my spreadsheet is something similar to a Trinity Study in that we examine all possible market conditions (returns and volatility) and we examine the performance of these leveraged funds over every 10 yr, 15 yr, whatever yr period. If you examine my spreadsheet closer, you see the longer you hold these, the more likely you will outperform the x1 leveraged based on previous market conditions.

So in turn, i can only agree with your statement of "If you don't rebalance, volatility will decay your returns over time." for etfs with leverage of greater than 5. Otherwise you come out ahead if held long enough due to long term slight bull nature of the market.

Over the long term a rebalanced LETF strategy will always outperform an unbalanced one.  Look at that link you posted earlier, the x3 strategy performed worse than x1 from 1885 to 2009, x2 only performed slightly better.  You did your simulation from 1950 where the results were better - but x3 still only achieved about double x1.  However had you rebalanced, you would have achieved close to x3, assuming you rebalanced often enough.
« Last Edit: November 10, 2014, 11:06:04 PM by zb3 »

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #23 on: November 10, 2014, 11:09:49 PM »
As far as rebalancing goes, this idea I haven't explored yet. My original post was to compare x1 leveraged funds (indexes) to that of x2 and x3. The way I understand it, rebalancing is a way to mitigate risk at the expense of returns. For me, my risk tolerance is extremely great (I'm 21 yo) so I'm willing to not rebalance and just stomach the large swings until FIRE years.

Rebalancing in this instance increases returns and reduces risk.  Unbalanced SSO over the same period would have returned almost the same as SPY.  If you don't rebalance, volatility will decay your returns over time.  In choppy markets volatility decay can be extreme, esp for x3 LEFTs.  For example in 2011 UPRO returned - 11.9% whereas SPY returned positive 1.9%.  Had you rebalanced UPRO quarterly, you'd have only lost 0.55% (still 2.45% below SPY - although 2011 was a terrible year), not 11.9%.

I agree with you in these specific cases, but these are just that, specific cases. The historical market hasn't continued to be that volatile, so why would I expect that. And if I do expect the future market to be that volatile/pessimistic, then i got bigger issues than figuring out whether leveraged etfs are a good investment.

What I was trying to illustrate in my spreadsheet is something similar to a Trinity Study in that we examine all possible market conditions (returns and volatility) and we examine the performance of these leveraged funds over every 10 yr, 15 yr, whatever yr period. If you examine my spreadsheet closer, you see the longer you hold these, the more likely you will outperform the x1 leveraged based on previous market conditions.

So in turn, i can only agree with your statement of "If you don't rebalance, volatility will decay your returns over time." for etfs with leverage of greater than 5. Otherwise you come out ahead if held long enough due to long term slight bull nature of the market.

Over the long term a rebalanced LETF strategy will always outperform an unbalanced one.  Look at that link you posted earlier, the x3 strategy performed worse than x1, x2 only performed slightly better.  You did your simulation from 1950 where the results were better.  According to that link you posted earlier x3 achieved nearly double x1.  However had you rebalanced, you would have achieved close to x3, assuming you rebalanced often enough.

ooooohhhhh, yes the link, i understand now. I posted the link to illustrate the math. He did his on US Total Stock Market. That is where you see that x2>x1>x3 in terms of return. If you scroll down on the page to S&P 500 specific chart, you see that x3>x4>x2>x1 in terms of return. Doing the analysis myself, I got almost exactly what he illustrates on that chart.

zb3

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Re: Triple-Leverage ETF
« Reply #24 on: November 10, 2014, 11:20:08 PM »
ooooohhhhh, yes the link, i understand now. I posted the link to illustrate the math. He did his on US Total Stock Market. That is where you see that x2>x1>x3 in terms of return. If you scroll down on the page to S&P 500 specific chart, you see that x3>x4>x2>x1 in terms of return. Doing the analysis myself, I got almost exactly what he illustrates on that chart.

Yes the analysis from 1950 till now did show LETFs outperforming x1.  All I'm saying is that you would outperform even more with less risk if you rebalanced.  Try a rebalancing strategy and see.  Rebalance to the value of what SPY would have been at (remember to incl dividends reinvested) and put the excess in a bond fund.  Choose rebalancing bands or time periods.  For SSO you'd probably still do ok rebalancing yearly, whereas UPRO you'd need to rebalance at least quarterly.  If I were any good at excel I would do this myself.  I'd be interested to hear how you get on.

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #25 on: November 10, 2014, 11:26:16 PM »
ooooohhhhh, yes the link, i understand now. I posted the link to illustrate the math. He did his on US Total Stock Market. That is where you see that x2>x1>x3 in terms of return. If you scroll down on the page to S&P 500 specific chart, you see that x3>x4>x2>x1 in terms of return. Doing the analysis myself, I got almost exactly what he illustrates on that chart.

Yes the analysis from 1950 till now did show LETFs outperforming x1.  All I'm saying is that you would outperform even more with less risk if you rebalanced.  Try a rebalancing strategy and see.  Rebalance to the value of what SPY would have been at (remember to incl dividends reinvested) and put the excess in a bond fund.  Choose rebalancing bands or time periods.  For SSO you'd probably still do ok rebalancing yearly, whereas UPRO you'd need to rebalance at least quarterly.  If I were any good at excel I would do this myself.  I'd be interested to hear how you get on.

Excel challenge! Ill get on that this week. I am glad we are on the same page now. I guess a more blatant question I had about leveraged etfs is that, rebalancing aside, if x2 leveraged fund performs better than x1 and risk/volatility is not an issue (i.e. young or rich enough), why not just buy and hold x2 leverage forever (or at least until FIRE years to mitigate volatility)?

zb3

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Re: Triple-Leverage ETF
« Reply #26 on: November 10, 2014, 11:56:53 PM »
ooooohhhhh, yes the link, i understand now. I posted the link to illustrate the math. He did his on US Total Stock Market. That is where you see that x2>x1>x3 in terms of return. If you scroll down on the page to S&P 500 specific chart, you see that x3>x4>x2>x1 in terms of return. Doing the analysis myself, I got almost exactly what he illustrates on that chart.

Yes the analysis from 1950 till now did show LETFs outperforming x1.  All I'm saying is that you would outperform even more with less risk if you rebalanced.  Try a rebalancing strategy and see.  Rebalance to the value of what SPY would have been at (remember to incl dividends reinvested) and put the excess in a bond fund.  Choose rebalancing bands or time periods.  For SSO you'd probably still do ok rebalancing yearly, whereas UPRO you'd need to rebalance at least quarterly.  If I were any good at excel I would do this myself.  I'd be interested to hear how you get on.

Excel challenge! Ill get on that this week. I am glad we are on the same page now. I guess a more blatant question I had about leveraged etfs is that, rebalancing aside, if x2 leveraged fund performs better than x1 and risk/volatility is not an issue (i.e. young or rich enough), why not just buy and hold x2 leverage forever (or at least until FIRE years to mitigate volatility)?

That simulation doesn't include dividends or fees, so the real results may be different.  You prob could still hold them long term, although the risk adjusted return is low.  Past performance is no guarantee of future returns.  All it would take is one bad year to wipe you out completely (well effectively you'd be wiped out completely, not literally as LEFTs deleverage, but I consider a balance of a few dollars to be wiped out).  Its much better to rebalance as your risk adjusted return is far higher.
« Last Edit: November 10, 2014, 11:58:38 PM by zb3 »

ChickenMonster7

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Re: Triple-Leverage ETF
« Reply #27 on: November 11, 2014, 01:58:39 AM »
ooooohhhhh, yes the link, i understand now. I posted the link to illustrate the math. He did his on US Total Stock Market. That is where you see that x2>x1>x3 in terms of return. If you scroll down on the page to S&P 500 specific chart, you see that x3>x4>x2>x1 in terms of return. Doing the analysis myself, I got almost exactly what he illustrates on that chart.

Yes the analysis from 1950 till now did show LETFs outperforming x1.  All I'm saying is that you would outperform even more with less risk if you rebalanced.  Try a rebalancing strategy and see.  Rebalance to the value of what SPY would have been at (remember to incl dividends reinvested) and put the excess in a bond fund.  Choose rebalancing bands or time periods.  For SSO you'd probably still do ok rebalancing yearly, whereas UPRO you'd need to rebalance at least quarterly.  If I were any good at excel I would do this myself.  I'd be interested to hear how you get on.

Excel challenge! Ill get on that this week. I am glad we are on the same page now. I guess a more blatant question I had about leveraged etfs is that, rebalancing aside, if x2 leveraged fund performs better than x1 and risk/volatility is not an issue (i.e. young or rich enough), why not just buy and hold x2 leverage forever (or at least until FIRE years to mitigate volatility)?

That simulation doesn't include dividends or fees, so the real results may be different.  You prob could still hold them long term, although the risk adjusted return is low.  Past performance is no guarantee of future returns.  All it would take is one bad year to wipe you out completely (well effectively you'd be wiped out completely, not literally as LEFTs deleverage, but I consider a balance of a few dollars to be wiped out).  Its much better to rebalance as your risk adjusted return is far higher.

Ill redo it later this week and try to include dividends and rebalancing. But the points you make are very valid.

pbkmaine

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Re: Triple-Leverage ETF
« Reply #28 on: November 11, 2014, 03:59:16 AM »

Please Google "Long Term Capital Management" to see what the use of leverage did to the portfolios of some of the smartest people on the planet.

I would agree leverage adds to the risk, but I would say that the situation you noted above had other factors involved (a couple foreign financial crises) as well as a very different investing strategy (which from my extremely limited knowledge of it seemed to be exploiting the differences in bond prices). I am probably reading past your message, but you can't possibly be generalizing leverage as bad, could you?

I analyze investments for a living, and have developed a prejudice against complicated ones. The farther one gets away from the original investment, the harder it is to determine how it will perform in some future market craziness. So I own plain vanilla index funds. I work with boards of large organizations. The most financially sophisticated board members (derivatives traders, finance professors, Fed governors, economists) tend to own index funds as well.

DrF

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Re: Triple-Leverage ETF
« Reply #29 on: November 11, 2014, 09:29:50 AM »
Hello ZB3,

I read through much of the thread on Bogleheads, and I must say it was very interesting, if a bit technical.

What are your thoughts of incorporating Value Averaging with leveraged ETFs? Instead of merely rebalancing, you set a specific % increase every quarter/year that you want to hit with your ETF. If you exceed the % then you sell everything above that target to your bond fund. If you trail the % then you buy from your bond fund. It is very similar to rebalancing, but you may be able to squeeze a little more return through Value Averaging.

DrF

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Re: Triple-Leverage ETF
« Reply #30 on: November 11, 2014, 10:34:26 AM »
I made this Value Averaging spreadsheet using the 3x Midcap fund UMDD a few years ago, and have modified it from time to time.

I just spent some time updating it. The triple leveraged funds often do a 2-1 split to keep the price between $25-$100, so at the tail end I had to multiply the current price by 2. I have not accounted for any fund fees here.

It seems as though the sweet spot is right at ~2.3% return per month, or 7% per quarter (based on historical returns). Any more than this and you have to bring some substantial new cash to the ETF at multiple points. The return will probably be lower than this going forward because this period (2010-present) has been an impressive bull. Maybe a return of ~1.8-2% could be feasible long term, especially if you've got your side account built up nicely.

What actually helps your returns is the volatility, because it presents buying opportunities. I tested the 3x Smallcap URTY, but UMDD was superior, but going forward URTY might be better.

Please let me know if you see any errors on the sheet.

Jack

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Re: Triple-Leverage ETF
« Reply #31 on: November 11, 2014, 11:09:09 AM »
Forgive me if this is a silly question, but what's the difference between buying one of these fancy leveraged ETFs vs. simply buying a regular one (e.g. SPDR or VOO) on margin? Wouldn't doing the latter eliminate the tracking error / volatility drag that causes the "leveraged ETFs are not for buy-and-hold" warnings?

DrF

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Re: Triple-Leverage ETF
« Reply #32 on: November 11, 2014, 11:19:27 AM »
The most obvious to me is the dreaded margin call. If you are really trying to push your leverage using margin you could get wiped out with a large drop in the market.

My limited understanding of margin is that you are able to borrow based on the assets you have in your account. If you lose 50% of your assets and get a margin call, your ability to borrow is decreased substantially.

Leveraged ETFs don't use margin, so no margin call ever.

Also, the fees for leveraged ETFs are less than margin. I'm not sure what margin rates are (between 4-12%). Most leveraged index funds are <1%. This saves you a substantial amount of money over time.

hodedofome

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Re: Triple-Leverage ETF
« Reply #33 on: November 11, 2014, 02:20:02 PM »
Check with your broker. Some brokers have more strict margin requirements for leveraged ETFs. So holding those is not any better than going on margin with an unleveraged ETF.

DrF

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Re: Triple-Leverage ETF
« Reply #34 on: November 11, 2014, 02:28:34 PM »
Check with your broker. Some brokers have more strict margin requirements for leveraged ETFs. So holding those is not any better than going on margin with an unleveraged ETF.

I do not know what you mean here ^^ hodedofome. You buy the 2x or 3x ETF so you don't have to use margin. Most brokers won't give you any margin credit based on leveraged assets, in my experience (IME).

You can buy leveraged ETFs with cash in your account with no limitations by your broker. There are no additional broker fees (other than trading).

zb3

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Re: Triple-Leverage ETF
« Reply #35 on: November 11, 2014, 02:46:42 PM »
I made this Value Averaging spreadsheet using the 3x Midcap fund UMDD a few years ago, and have modified it from time to time.

I just spent some time updating it. The triple leveraged funds often do a 2-1 split to keep the price between $25-$100, so at the tail end I had to multiply the current price by 2. I have not accounted for any fund fees here.

It seems as though the sweet spot is right at ~2.3% return per month, or 7% per quarter (based on historical returns). Any more than this and you have to bring some substantial new cash to the ETF at multiple points. The return will probably be lower than this going forward because this period (2010-present) has been an impressive bull. Maybe a return of ~1.8-2% could be feasible long term, especially if you've got your side account built up nicely.

What actually helps your returns is the volatility, because it presents buying opportunities. I tested the 3x Smallcap URTY, but UMDD was superior, but going forward URTY might be better.

Please let me know if you see any errors on the sheet.

I think what you are advocating for is rebalancing bands - i.e. rebalance when the LEFT deviates a certain percentage from your target.  At what percentage do you suggest rebalancing at?  If you suggested 2.3% that is far too low.  If SPY goes up 1%, UPRO will go up 3%, thats almost a 2% deviation (i.e. if you started at 100, spy would be 101 and UPRO would be 103).  In that case you'd be rebalancing every second day.  15% rebalancing bands are probably better.

zb3

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Re: Triple-Leverage ETF
« Reply #36 on: November 11, 2014, 02:47:40 PM »
The most obvious to me is the dreaded margin call. If you are really trying to push your leverage using margin you could get wiped out with a large drop in the market.

My limited understanding of margin is that you are able to borrow based on the assets you have in your account. If you lose 50% of your assets and get a margin call, your ability to borrow is decreased substantially.

Leveraged ETFs don't use margin, so no margin call ever.

Also, the fees for leveraged ETFs are less than margin. I'm not sure what margin rates are (between 4-12%). Most leveraged index funds are <1%. This saves you a substantial amount of money over time.

IB charges 1.59% margin rates.  UPRO has an expense ratio of .95% but then you also need to include the implied financing rate, which is 0.4% on futures at the moment.

zb3

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Re: Triple-Leverage ETF
« Reply #37 on: November 11, 2014, 02:48:32 PM »
Forgive me if this is a silly question, but what's the difference between buying one of these fancy leveraged ETFs vs. simply buying a regular one (e.g. SPDR or VOO) on margin? Wouldn't doing the latter eliminate the tracking error / volatility drag that causes the "leveraged ETFs are not for buy-and-hold" warnings?

It all depends on your tax regime, LEFTs are the best for me, futures are the best for Americans IMO.

DrF

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Re: Triple-Leverage ETF
« Reply #38 on: November 11, 2014, 03:03:01 PM »
I made this Value Averaging spreadsheet using the 3x Midcap fund UMDD a few years ago, and have modified it from time to time.

I just spent some time updating it. The triple leveraged funds often do a 2-1 split to keep the price between $25-$100, so at the tail end I had to multiply the current price by 2. I have not accounted for any fund fees here.

It seems as though the sweet spot is right at ~2.3% return per month, or 7% per quarter (based on historical returns). Any more than this and you have to bring some substantial new cash to the ETF at multiple points. The return will probably be lower than this going forward because this period (2010-present) has been an impressive bull. Maybe a return of ~1.8-2% could be feasible long term, especially if you've got your side account built up nicely.

What actually helps your returns is the volatility, because it presents buying opportunities. I tested the 3x Smallcap URTY, but UMDD was superior, but going forward URTY might be better.

Please let me know if you see any errors on the sheet.

I think what you are advocating for is rebalancing bands - i.e. rebalance when the LEFT deviates a certain percentage from your target.  At what percentage do you suggest rebalancing at?  If you suggested 2.3% that is far too low.  If SPY goes up 1%, UPRO will go up 3%, thats almost a 2% deviation (i.e. if you started at 100, spy would be 101 and UPRO would be 103).  In that case you'd be rebalancing every second day.  15% rebalancing bands are probably better.

I'm suggesting that you rebalance monthly or quarterly on a specific day no matter what. If you rebalance monthly then your target should be ~2.3% based on my calculations where you should not need to bring much new money to the ETF. If you rebalance quarterly then your target should be ~7%. Anything over these targets would be sold and kept in your cash/bond account until the next "rebalancing" date. If you fall short of your % target, then you will have money in your cash/bond account to buy up to the necessary target percent.

Examples:
1) 10000 initial investment in UPRO - UPRO goes up 5% in one month = $500 - sell ~3% or $300 worth of UPRO and put that into your cash/bond account

2) 10000 initial investment in UPRO - UPRO goes down 2% in one month = -$200 - buy ~4.3% or $430 worth of UPRO from your cash/bond account

Repeat this indefinitely and you remove volatility while realizing improved returns. Like I said, it is very similar to rebalancing based on AA %. So, it may be less complicated to do a AA rebalance monthly/quarterly.

zb3

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Re: Triple-Leverage ETF
« Reply #39 on: November 11, 2014, 03:30:54 PM »
I made this Value Averaging spreadsheet using the 3x Midcap fund UMDD a few years ago, and have modified it from time to time.

I just spent some time updating it. The triple leveraged funds often do a 2-1 split to keep the price between $25-$100, so at the tail end I had to multiply the current price by 2. I have not accounted for any fund fees here.

It seems as though the sweet spot is right at ~2.3% return per month, or 7% per quarter (based on historical returns). Any more than this and you have to bring some substantial new cash to the ETF at multiple points. The return will probably be lower than this going forward because this period (2010-present) has been an impressive bull. Maybe a return of ~1.8-2% could be feasible long term, especially if you've got your side account built up nicely.

What actually helps your returns is the volatility, because it presents buying opportunities. I tested the 3x Smallcap URTY, but UMDD was superior, but going forward URTY might be better.

Please let me know if you see any errors on the sheet.

I think what you are advocating for is rebalancing bands - i.e. rebalance when the LEFT deviates a certain percentage from your target.  At what percentage do you suggest rebalancing at?  If you suggested 2.3% that is far too low.  If SPY goes up 1%, UPRO will go up 3%, thats almost a 2% deviation (i.e. if you started at 100, spy would be 101 and UPRO would be 103).  In that case you'd be rebalancing every second day.  15% rebalancing bands are probably better.

I'm suggesting that you rebalance monthly or quarterly on a specific day no matter what. If you rebalance monthly then your target should be ~2.3% based on my calculations where you should not need to bring much new money to the ETF. If you rebalance quarterly then your target should be ~7%. Anything over these targets would be sold and kept in your cash/bond account until the next "rebalancing" date. If you fall short of your % target, then you will have money in your cash/bond account to buy up to the necessary target percent.

Examples:
1) 10000 initial investment in UPRO - UPRO goes up 5% in one month = $500 - sell ~3% or $300 worth of UPRO and put that into your cash/bond account

2) 10000 initial investment in UPRO - UPRO goes down 2% in one month = -$200 - buy ~4.3% or $430 worth of UPRO from your cash/bond account

Repeat this indefinitely and you remove volatility while realizing improved returns. Like I said, it is very similar to rebalancing based on AA %. So, it may be less complicated to do a AA rebalance monthly/quarterly.

Hi DrFunk,

I see what you mean now.  The only problem I have with your strategy is that it doesn't follow the trend of the underlying (i.e. SPY).  In a bear market, you are exposing yourself far too much to the market.  If in 2008-2009 you had rebalanced to a gain of 2.3% every month, you would have got absolutely annihilated by the market and would have likely chewed up your entire bond fund.  In an uptrend, you may not be exposing yourself enough.  Ie in some months SPY can rise by 10%, but you'd only rebalance to 2.3%.  In my opinion it is always best to balance to some measure of the underlying, either through rebalancing bands of 15 to 20% or time periods.  I have only tested time periods so far, and for SSO yearly is okay, whereas UPRO needs to be rebalanced more often.  I have yet to experiment with rebalancing bands.  I finish my last exam ever this afternoon so will then have more time to experiment.

DrF

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Re: Triple-Leverage ETF
« Reply #40 on: November 11, 2014, 06:42:42 PM »
The most obvious to me is the dreaded margin call. If you are really trying to push your leverage using margin you could get wiped out with a large drop in the market.

My limited understanding of margin is that you are able to borrow based on the assets you have in your account. If you lose 50% of your assets and get a margin call, your ability to borrow is decreased substantially.

Leveraged ETFs don't use margin, so no margin call ever.

Also, the fees for leveraged ETFs are less than margin. I'm not sure what margin rates are (between 4-12%). Most leveraged index funds are <1%. This saves you a substantial amount of money over time.

IB charges 1.59% margin rates.  UPRO has an expense ratio of .95% but then you also need to include the implied financing rate, which is 0.4% on futures at the moment.

My margin account at merrell lynch is ~5% I believe, don't know for sure because I haven't used it in a while. I think most large brokers are similar.

I've never heard of an "implied finance rate" in conjunction with any pro shares leveraged ETFs. Is it built in to the ER already? Or is it only for other futures contracts?

DrF

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Re: Triple-Leverage ETF
« Reply #41 on: November 11, 2014, 07:05:39 PM »
Hi DrFunk,

I see what you mean now.  The only problem I have with your strategy is that it doesn't follow the trend of the underlying (i.e. SPY).  In a bear market, you are exposing yourself far too much to the market.  If in 2008-2009 you had rebalanced to a gain of 2.3% every month, you would have got absolutely annihilated by the market and would have likely chewed up your entire bond fund.  In an uptrend, you may not be exposing yourself enough.  Ie in some months SPY can rise by 10%, but you'd only rebalance to 2.3%.  In my opinion it is always best to balance to some measure of the underlying, either through rebalancing bands of 15 to 20% or time periods.  I have only tested time periods so far, and for SSO yearly is okay, whereas UPRO needs to be rebalanced more often.  I have yet to experiment with rebalancing bands.  I finish my last exam ever this afternoon so will then have more time to experiment.

During a bull market you harvest gains with this approach, and I could argue that this method forces you to buy into a bear market. Thus, perfectly applying the adage, buy low sell high. But, I too, think that modifications would vastly improve returns. During bull markets you can let the position ride longer, and after you buy into a bear market you would definitely want to hold your position longer. Wouldn't it be nice if you rebalanced with this method at the bottom of the market in spring of 2009?

I think we are basically saying the same thing. Rebalance often with leveraged ETFs for decreased volatility and improved returns. It would be nice if someone did the comparison of value averaging vs AA rebalancing using SSO or MVV. I might have the time next week.

Cheers

hodedofome

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Re: Triple-Leverage ETF
« Reply #42 on: November 11, 2014, 07:31:05 PM »

Check with your broker. Some brokers have more strict margin requirements for leveraged ETFs. So holding those is not any better than going on margin with an unleveraged ETF.

I do not know what you mean here ^^ hodedofome. You buy the 2x or 3x ETF so you don't have to use margin. Most brokers won't give you any margin credit based on leveraged assets, in my experience (IME).

You can buy leveraged ETFs with cash in your account with no limitations by your broker. There are no additional broker fees (other than trading).

https://ibkb.interactivebrokers.com/article/1124

zb3

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Re: Triple-Leverage ETF
« Reply #43 on: November 11, 2014, 10:18:55 PM »
The most obvious to me is the dreaded margin call. If you are really trying to push your leverage using margin you could get wiped out with a large drop in the market.

My limited understanding of margin is that you are able to borrow based on the assets you have in your account. If you lose 50% of your assets and get a margin call, your ability to borrow is decreased substantially.

Leveraged ETFs don't use margin, so no margin call ever.

Also, the fees for leveraged ETFs are less than margin. I'm not sure what margin rates are (between 4-12%). Most leveraged index funds are <1%. This saves you a substantial amount of money over time.

IB charges 1.59% margin rates.  UPRO has an expense ratio of .95% but then you also need to include the implied financing rate, which is 0.4% on futures at the moment.

My margin account at merrell lynch is ~5% I believe, don't know for sure because I haven't used it in a while. I think most large brokers are similar.

I've never heard of an "implied finance rate" in conjunction with any pro shares leveraged ETFs. Is it built in to the ER already? Or is it only for other futures contracts?

Its not built into the ER, it affects the returns.  You could put 6k down and buy 1 Emini, which would give you exposure to slightly over 100k of S&P500.  Eminis trade at a discount to cash price currently (it trades at a premium where interest rates > div yields), but converge with cash price at expiry.  So if you bought a contract and nothing changed, you'd make roughly 8 x 50 = 400.  However the contract doesn't give you dividends, dividend yield is around 2% on the S&P - this equates to 500 dollars of dividends the futures holder would give up over a 3 month period.  Thus the implied interest rate is 500 - 400 = 100.  This example isn't using real numbers, I just made them up.  The principle is the same though, and the implied interest rate at the moment for an Emini equates to 0.4% pa.


zb3

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Re: Triple-Leverage ETF
« Reply #44 on: November 11, 2014, 10:20:59 PM »
Hi DrFunk,

I see what you mean now.  The only problem I have with your strategy is that it doesn't follow the trend of the underlying (i.e. SPY).  In a bear market, you are exposing yourself far too much to the market.  If in 2008-2009 you had rebalanced to a gain of 2.3% every month, you would have got absolutely annihilated by the market and would have likely chewed up your entire bond fund.  In an uptrend, you may not be exposing yourself enough.  Ie in some months SPY can rise by 10%, but you'd only rebalance to 2.3%.  In my opinion it is always best to balance to some measure of the underlying, either through rebalancing bands of 15 to 20% or time periods.  I have only tested time periods so far, and for SSO yearly is okay, whereas UPRO needs to be rebalanced more often.  I have yet to experiment with rebalancing bands.  I finish my last exam ever this afternoon so will then have more time to experiment.

During a bull market you harvest gains with this approach, and I could argue that this method forces you to buy into a bear market. Thus, perfectly applying the adage, buy low sell high. But, I too, think that modifications would vastly improve returns. During bull markets you can let the position ride longer, and after you buy into a bear market you would definitely want to hold your position longer. Wouldn't it be nice if you rebalanced with this method at the bottom of the market in spring of 2009?

I think we are basically saying the same thing. Rebalance often with leveraged ETFs for decreased volatility and improved returns. It would be nice if someone did the comparison of value averaging vs AA rebalancing using SSO or MVV. I might have the time next week.

Cheers

Yes I agree, both similar approaches, the returns would depend on the market.  In a small correction your approach would work well.  Although in a prolonged bear market the results may be worrying - would need to run the numbers though.

zb3

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Re: Triple-Leverage ETF
« Reply #45 on: November 11, 2014, 10:22:11 PM »

Check with your broker. Some brokers have more strict margin requirements for leveraged ETFs. So holding those is not any better than going on margin with an unleveraged ETF.

I do not know what you mean here ^^ hodedofome. You buy the 2x or 3x ETF so you don't have to use margin. Most brokers won't give you any margin credit based on leveraged assets, in my experience (IME).

You can buy leveraged ETFs with cash in your account with no limitations by your broker. There are no additional broker fees (other than trading).

https://ibkb.interactivebrokers.com/article/1124

Hodedofome, that link applies to when buying LEFTs on margin.  You get margin called earlier due to the fact that LEFTs are already leveraged.  If you buy the left outright there is no margin call, and you're still leveraged.

Grog

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Re: Triple-Leverage ETF
« Reply #46 on: November 13, 2014, 07:00:01 AM »
For investor NOT in the US you could use CFD to leverage your preferred ETF.

Let's say you buy 10'000 usd worth of Vanguard total stock.
You now have an account value of 10'000.

You could then buy on margin 10'000 USD of CFD of the same stock. CFD for this kind of stock requires a coverture of about 5-10%, that means that you always have to have 1000 USD worth in your account (10% of 10'000 USD bought on margin). But since your underlying asset are the same, if the Vanguard ETF goes to 20'000, your minimum account required would amount to 2000 which you always comply since the underlying is the same as the CFD bought on margin.

The drawback is that every night you have to pay interest over the margin (usually libor overnight +3% /360 day). So you risk to pay a lot of interest if the rates increase and the stock market is plumbing along (and you don't want to close the position at loss).

The advantage is that you do not suffer from volatility decay since you are investing in Vanguard normal ETF, but with double/triple of the money, and if you keep your amount of leverage low you won't suffer of a margin call since your CFD and your underlying asset are the same, fluctuating identically.



The big risk is increasing credit rate. But do your homework before starting trading on CFD, I know I'm still doing mine.

arebelspy

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Re: Triple-Leverage ETF
« Reply #47 on: November 13, 2014, 07:27:36 AM »
For investor NOT in the US you could use CFD to leverage your preferred ETF.

Let's say you buy 10'000 usd worth of Vanguard total stock.
You now have an account value of 10'000.

You could then buy on margin 10'000 USD of CFD of the same stock. CFD for this kind of stock requires a coverture of about 5-10%, that means that you always have to have 1000 USD worth in your account (10% of 10'000 USD bought on margin). But since your underlying asset are the same, if the Vanguard ETF goes to 20'000, your minimum account required would amount to 2000 which you always comply since the underlying is the same as the CFD bought on margin.

The drawback is that every night you have to pay interest over the margin (usually libor overnight +3% /360 day). So you risk to pay a lot of interest if the rates increase and the stock market is plumbing along (and you don't want to close the position at loss).

The advantage is that you do not suffer from volatility decay since you are investing in Vanguard normal ETF, but with double/triple of the money, and if you keep your amount of leverage low you won't suffer of a margin call since your CFD and your underlying asset are the same, fluctuating identically.



The big risk is increasing credit rate. But do your homework before starting trading on CFD, I know I'm still doing mine.

Interesting, if true. Would love to hear other's comments.

Sounds like just the thing to have in place for the next market crash.
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Re: Triple-Leverage ETF
« Reply #48 on: November 13, 2014, 08:25:36 AM »
I agree that this is something that could work best during a recovery. I would love to hear other's comments too, but I don't know if here is the best place for a feedback since CFD are illegal in the US but legal in most of the other countries, so since this is a US forum I don't think many have experience with this.

The more I read about it it really just seems a margin loan with interest paid back daily and with the minimum margin level that is calculated real time basing on the value of your open position. Remember that they can change the percentage of leverage (so during a crash they could decide that the minimum is not more 10% but 50%!) so account for that...

I'm not using them, I know you can use it to leverage, that's it, and seem interesting since is something where the margin call seem slightly more difficult to happen that with normal margin. But maybe I'm wrong.

DrF

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Re: Triple-Leverage ETF
« Reply #49 on: December 24, 2014, 10:19:30 AM »
So, I had some time here while everyone else is on vacation this week.

I wanted to see how DCA into a 2x fund would test over the life of the fund. This does not take expenses into consideration.

Looks pretty fucking sweet to me.

DCA into SSO with $1000 per month. Personal contributions over the 70 months tested = $70,000.

Current value of the investment = $170,579.3

Annual return ~ 21.2%

DCA into MVV with same scenario.

Current value of investment = $172,148

Annual return ~ 21.4%

Please correct me if I did the annual return calculation incorrectly.