The long and short of it is that I want to buy a leveraged mutual fund DXSLX to move towards a more efficient portfolio by keeping my stock exposure constant and adding to my bond exposure. Read on for details.
Here is my current situation:
Emergency funds: 3 months expenses
- 18,000 Student Loans @ 6%
- 1,320 Employer Student Loan Re-payment @ 0%
Tax Rate: 22% Federal, 3.3% State, 1.75% County
State of Residence: Indiana
Ages: 27 & 25
Current Asset allocation: 90% stocks / 10% bonds
Current International allocation: 33% of stocks
My tax-adjusted target Allocations currently are as follows:
Total US Stock Market 54.00%
Total US Bond Market 10.00%
Developed International Markets 20.00%
Emerging Markets 10.00%
Current retirement assets
14.2% 100% Schwab S&P 500 Index Fund (SWPPX) (.03%)
Company matches 50% of contributions up to 2% of salary.
His Roth IRA at Vanguard
9% Vanguard Total Bond Market Investor Class (VBMFX) (0.15%)
10% Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) (0.32%) (~$8,600)
5% VANGUARD REIT INDEX ETF (VNQ) (.12%)
<1% VANGUARD TOTAL STOCK MARKET ETF (VTI) (.04%)
Her Roth IRA at Vanguard
8% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.15%)
His Rollover IRA at Fidelity
19% Fidelity® International Index Fund Premium Class (FSIVX) (0.06%)
33% Fidelity® Total Market Index Fund Premium Class (FSTVX) (0.035%)
I’ve had this allocation for 3 years now, rebalancing monthly at the beginning of each month.
Portolio size is currently just above 6 figures and all are in tax-advantaged accounts — an employer 401k, a traditional ira (rolled over from previous employer), and his/her roth iras, and an hsa. I currently max out his 401k, two roth IRAs, and his HSA for the family, as well as contribute $14,400/yr towards the student loan (target mid-2019 to be debt free).
I eventually want to take my AA from 90/10 to 125/125 (50/50 leveraged 2x). Because of the way my accounts are split up, until my portfolio grows to where I can comfortably commit to 125/125, I will move towards a 90/30 allocation through a leveraged mutual fund the Direxion Monthly S&P 500 Bull Fund (DXSLX).
The prospectus for the fund can be found here: http://www.direxioninvestments.com/prod ... ll-2x-fund.
From the website:
I want to do this for much the same reasons stated in the classic thread “Should I use margin to buy a balanced fund?” . After reading through the entire thread, I agree that the proper way to adjust risk over time should be to adjust leverage on an efficient portfolio, rather than adjust allocations from stocks to bonds over time. My estimate of an efficient portfolio right now for the future is 50/50 given the low bond rates, however I can be convinced it is anywhere from about 30/70 to 55/45 (nobody knows nothin…).The Direxion Monthly S&P 500 Bull & Bear 2X Funds seek monthly investment results, before fees and expenses, of 200% of the calendar month performance of the S&P 500® Index.
Being that I am relatively young in my investing life, with future contributions as the majority of my portfolio value, I would like to leverage a 50/50 portfolio 2.5x. However, that is difficult to do given my current portfolio size and the way my assets are divided over several different accounts. In the meantime, I’d like to move from my current 90/10 to a 90/30 allocation, to move towards a more efficient portfolio.
There are 3 ways I can see I can get leverage:
* Margin loan in interactive brokers — Downside is 2.92% interest rate right now on amounts up to 300k…
* Futures market (S&P e-mini) — Downside is the current notional value of >$140k on one contract right now, which would automatically give me more leverage than I want given my portfolio size, and also a heighted risk from having at most 60k in one account that further restricts my ability to take on leverage.
* DXSLX — Downside is the 1.49% expense ratio, along with potential tracking error.
I would like to invest in DXSLX until my portfolio size in a single account becomes large enough for me to invest in the e-mini without taking outsized risk. I figure that will be around the time when one account gets to the notional value of the e-mini.
Here are the reasons NOT to do this, and why I still want to after considering them:
CONCERN: "The expense ratio of 1.49% is too high."
I am getting 2x the exposure to the S&P 500 index, so in effect the expense ratio is 75 basis points on an exposure-normalized basis. That is still really bad for an index fund, but not as egregious as the 1.49% looks. Another way to think about this is that I’m paying ~1.46% interest on a margin loan to invest in the index, which I think is a good deal compared to ~2.5% on interactive brokers. That interest rate is not competitive with the implicit rate on futures, but futures contracts would force me to take on more leverage than I currently want.
CONCERN: "You'll lose because of Volatility Drag on constant leverage"
For a summary of this concern see here: https://dqydj.com/dont-use-leveraged-etfs-unless/ or here: http://etfdb.com/leveraged-etfs/leverag ... with-etfs/
This fund targets 2x the MONTHLY return, not daily return. So in effect, you’ll only get the “buying high and selling low” effect of constant leverage 12 times a year, which is hugely different than ~250 times a year. In addition, I re-balance every month anyway, so I will rebalance the fund every month to bring the notional value of the fund (2x my investment) in line with my target allocation. In other words every time the fund resets their leverage (which is on the last trading day of the month), I will re-balance my portfolio to bring that new leverage amount in line with my AA. This will neutralize ALL volitility drag from the fund.
CONCERN: "The market is high right now, better not use leverage."
Either you believe in market timing or not, and I don't. So now is as good a time as ever to be invested. Besides, at least in the intermediate term, I won't be increasing stock exposure, but rather using the leverage to keep stock exposure constant while using the freed up liquidity to invest in bonds.
So, I put it to you bogleheads — What am I missing? Are there other reasons not to do this you can think of? I'm looking to see this from a fresh angle.
Thanks for all your comments in advance -- this is a fantastic community!
P.S. Yes, I have read the infamous market timer thread; and No, I don't plan leveraging higher than 2.5x, leveraging anything riskier than 50/50, using a credit card for loans, or leveraging anything other than stocks/bonds (& perhaps international stock indicies). I definitely have the temperament to stay the course and stick to these rules.