Author Topic: Leveraged ETFs  (Read 808 times)

uneven_cyclist

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Leveraged ETFs
« on: April 26, 2022, 07:42:55 PM »
Hello All,

I've been trying to figure out a good way to add leverage to my portfolio.  My wife and I are in the stage of our journey where we are earning + saving $$ as fast as we can and are probably 6-8 years from retirement.

I read a megathread on Bogleheads (Hedgefundie's Excellent Adventure) and it seems like their plan, which involved investing in a mix of UPRO and leveraged treasuries (55/45 I believe) was pretty reasonable.

I would honestly be more inclined to just take 10-15% of my porftolio and invest that chunk 100% in UPRO or TQQQ...would there be any reason not to go this route?

Hedgefundie's reasoning, as I understand it, was that they wanted to use Treasuries (leveraged treasuries I believe) to offset the major drawdowns that would invariably take place with a leveraged fund like UPRO.  My thinking though is...if I'm still working and if I still have a salary...then why not offset those huge drawdowns with my salary?  And the rest of my portfolio?

Some commenters on that thread were saying things like "be ready for a margin call"...can you have a margin call when holding a leveraged ETF?

Any concerns to be aware of otherwise with this strategy? 

Thanks all!


Heliios

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Re: Leveraged ETFs
« Reply #1 on: April 26, 2022, 08:23:40 PM »
No, you can't get a margin call for holding UPRO, the worst is that the value of the securities will drop to zero. I'll admit that leveraged ETFs such as UPRO have held up pretty well over the last decade, even through the pandemic crash. However, you'll notice that most leveraged ETFs aren't very old. The earliest seem to have been started in mid-2009. My understanding is thar during a prolonged bear market (ie. 2008, not the pandemic), that volatility decay will eat the value down to zero and the ETF will be delisted. Furthermore, the leveraged ETFs generally hold swaps and derivatives rather than the actual underlying securities, and these instruments seem to break during prolonged bear markets. If you are good at predicting bear markets, or if you use trailing stops, you might be able to make off like a bandit with UPRO. That said, if it were that easy, why isn't everyone doing it?

ChpBstrd

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Re: Leveraged ETFs
« Reply #2 on: April 26, 2022, 08:40:24 PM »
While on bogleheads, do not fail to read every page of market timer’s epic journey with the same rationale.

https://www.bogleheads.org/forum/viewtopic.php?t=5934

The “why not” part is obviously the potential for 90%+ losses in response to the sort of corrections that come around every 3-5 years on average. That’s why the prospectus says not to hold them longer than a day. Here’s a thought: why not just wait until the market’s next big correction to go triple-leveraged? Then you’ll have a real time buy signal instead of a hindsight regret signal.

Juan Ponce de León

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Re: Leveraged ETFs
« Reply #3 on: April 26, 2022, 08:51:36 PM »
I much prefer to hold normal ETF's with my margin loan.  I'm more confident in the value of it as an asset, I feel more in control of the leverage, I know my equity isn't being eaten by price decay or holes in the leveraging strategy and at least in Australia I know the interest costs of the ML give me a tax deduction.  I can pay off my margin loan as it suits me and revert to having non-leveraged assets without causing a taxable event.
« Last Edit: April 26, 2022, 08:53:53 PM by Juan Ponce de León »

nalor511

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Re: Leveraged ETFs
« Reply #4 on: April 26, 2022, 10:31:31 PM »
I much prefer to hold normal ETF's with my margin loan.  I'm more confident in the value of it as an asset, I feel more in control of the leverage, I know my equity isn't being eaten by price decay or holes in the leveraging strategy and at least in Australia I know the interest costs of the ML give me a tax deduction.  I can pay off my margin loan as it suits me and revert to having non-leveraged assets without causing a taxable event.

Margin loan not tax deductible in the US unless you itemize. Box spreads are though

vand

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Re: Leveraged ETFs
« Reply #5 on: April 27, 2022, 01:07:44 AM »
Long term interest only mortgage and don't pay it off is my primary form of leverage, but I largely steer clear of leveraged products - which are derivatives, not real assets. Derivatives have no intrinsic value and can go to zero.


There is a huge difference between:

Leveraging with long term non-callable debt
Leveraging with short term non callable debt
Leveraging with short term callable debt
Leveraging with leveraged products (can be combined with all of the above)

The further down this list you go the more you move from being an investor to being a speculator.

uneven_cyclist

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Re: Leveraged ETFs
« Reply #6 on: May 01, 2022, 06:23:26 PM »
While on bogleheads, do not fail to read every page of market timer’s epic journey with the same rationale.

https://www.bogleheads.org/forum/viewtopic.php?t=5934

The “why not” part is obviously the potential for 90%+ losses in response to the sort of corrections that come around every 3-5 years on average. That’s why the prospectus says not to hold them longer than a day. Here’s a thought: why not just wait until the market’s next big correction to go triple-leveraged? Then you’ll have a real time buy signal instead of a hindsight regret signal.

Thanks for sharing this.  Good to know...yes, I suppose right now I am trying to figure out (a) what the worst case scenario might be and (b) how likely it would be for that scenario to pan out (ie what conditions would need to be in place and so on).

It seems like there is a lot of upside potential and then also some increased risk of getting completely wiped out if conditions were just right (or wrong I should say) for a period of time. 

I'm going to keep learning a bit more about what this risk really looks like/what the mechanics are etc. before diving in.  I am less concerned about the volatility/variance as that seems somewhat more predictable.

Thank you all for your time and input.


uneven_cyclist

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Re: Leveraged ETFs
« Reply #7 on: May 01, 2022, 06:27:51 PM »
I much prefer to hold normal ETF's with my margin loan.  I'm more confident in the value of it as an asset, I feel more in control of the leverage, I know my equity isn't being eaten by price decay or holes in the leveraging strategy and at least in Australia I know the interest costs of the ML give me a tax deduction.  I can pay off my margin loan as it suits me and revert to having non-leveraged assets without causing a taxable event.

Thanks -- I had not considered this possible benefit of a margin loan in the sense that it gives you the ability to increase/decrease your leverage without facing tax consequences. 

Maybe a good approach might be to use leveraged ETFs in retirement accounts (Roth IRA etc) where there are no tax consequences for rebalancing, and then use margin loans in taxable accts?

MustacheAndaHalf

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Re: Leveraged ETFs
« Reply #8 on: May 01, 2022, 11:38:48 PM »
Margin loan not tax deductible in the US unless you itemize. Box spreads are though
I need to check on the year I took out a margin loan - the IRS might owe me.
https://www.irs.gov/pub/irs-pdf/f4952.pdf

Does the IRS recognize box spreads as being a loan?  I would expect a box spread is treated as a capital loss.  You get paid to sell 4 options, then later owe slightly more.  Net net result is like a loan, but I would think it gets applied to taxes as investment that lost money.

MustacheAndaHalf

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Re: Leveraged ETFs
« Reply #9 on: May 02, 2022, 12:35:48 AM »
While on bogleheads, do not fail to read every page of market timer’s epic journey with the same rationale.

https://www.bogleheads.org/forum/viewtopic.php?t=5934

The “why not” part is obviously the potential for 90%+ losses in response to the sort of corrections that come around every 3-5 years on average. That’s why the prospectus says not to hold them longer than a day. Here’s a thought: why not just wait until the market’s next big correction to go triple-leveraged? Then you’ll have a real time buy signal instead of a hindsight regret signal.
Thanks for sharing this.  Good to know...yes, I suppose right now I am trying to figure out (a) what the worst case scenario might be and (b) how likely it would be for that scenario to pan out (ie what conditions would need to be in place and so on).
Consider the very first line from the link ChpBstrd provided, which is also the thread you referenced in this thread:

Quote
Summary: Econ grad student applies Mortgage Your Retirement theory at the top of the last bull market
I suspect you're trying to imitate this experiment in one way you didn't intend: starting at the top of a bull market.  March 2020 was paved over with Fed stimulus and Congressional relief bills.  From 2019-2021 the stock market rose +21%/year.  In my view, 2009-2018 and 2019-2021 are part of the same bull market.

On TV, analysts generally have a disclosure screen showing any ties or investments they have relative to the stocks they discuss.  So here's mine: last week I started shorting the portfolio you mention here, using inverse versions of those ETFs.  If you look at YTD performance, bearish leveraged ETFs have done well.  After a bull market lasting 2009-2021, I expect a bear market - and probably deeper than the -10% YTD seen in the S&P 500, but I could be wrong.

According to ProShares, UPRO was created 06/23/2009.  I find that timing very revealing - they decided to start after a crash.  Maybe you should follow their lead, and avoid leveraged ETFs until after a crash?