Thoughts about Leveraged ETF's

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Alexander.c
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Thoughts about Leveraged ETF's

Post by Alexander.c »

Hello all,

I wouldnlilento know what were your thoughts on leveraged ETF's (pros and cons) such as UPRO. I am a relatively young investor. Therefore I am looking to place a little money in high risk/ high reward investments. Also if you know any Index funds that fall in this category. Please share. And state what you like about it.

I appreciate it.

Thank you for reading.
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vineviz
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Re: Thoughts about Leveraged ETF's

Post by vineviz »

Alexander.c wrote: Thu Sep 17, 2020 10:22 pm I wouldnlilento know what were your thoughts on leveraged ETF's (pros and cons) such as UPRO. I am a relatively young investor. Therefore I am looking to place a little money in high risk/ high reward investments. Also if you know any Index funds that fall in this category. Please share. And state what you like about it.
Welcome to the forum.

I'm not sure I'd put a daily leveraged ETF like UPRO into the "high risk/high reward" category. It's a niche tool with a specific purpose, and even calling it an "investment" is arguably a stretch.

In any case, if you have an investment goal smartest thing you can do is to articulate that goal and then build a plan that is likely to get you there. Maybe UPRO could play a small role in such a plan, but without the plan a leveraged ETF is as likely to move you AWAY from any goal you might have than TOWARDS it.

If you really want to put a little money to work in something risky, maybe try a small cap value fund like Vanguard S&P Small-Cap 600 Value ETF (VIOV)?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
MotoTrojan
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Re: Thoughts about Leveraged ETF's

Post by MotoTrojan »

Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Therefore I am looking to place a little money in high risk/ high reward investments.
Good thoughts from vineviz above but to flesh it out a bit more, while UPRO is high risk, I don't know that I would call it high reward. This thread's 1st post has a TON of great info on these funds, and actual ways to implement them to get some decent expected returns (albeit much lower than the past).

viewtopic.php?t=272007

While some of the pictures are missing, towards the bottom of the 1st post there is a great image under "Why not just 100% UPRO?"; as you can see, 100% UPRO actually SIGNIFICANTLY underperforms 100% S&P500.

I agree with vineviz that if you are looking for an evidence-based way to increase expected return that a fund with value or value/small factor exposure is the way to go and VIOV as mentioned is a great low-cost fund to gain exposure there. I personally have most of my portfolio in similar funds.
retiredjg
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Re: Thoughts about Leveraged ETF's

Post by retiredjg »

Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Hello all,

I wouldnlilento know what were your thoughts on leveraged ETF's (pros and cons) such as UPRO. I am a relatively young investor. Therefore I am looking to place a little money in high risk/ high reward investments. Also if you know any Index funds that fall in this category. Please share. And state what you like about it.

I appreciate it.

Thank you for reading.
Welcome to the forum. :happy

Leveraged ETFs are not really what this forum is about. There is some discussion here and a few long threads, but you should understand that leveraged ETFs have little to do with Jack Bogle's approach or basic Boglehead philosophy.

While you will find information about this type of investing here, I would encourage you to explore the basic Boglehead approach as well. The Wiki is a good place to do this.

https://www.bogleheads.org/wiki/Main_Page

https://www.bogleheads.org/wiki/Special:AllPages
potatopancake
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Re: Thoughts about Leveraged ETF's

Post by potatopancake »

MotoTrojan wrote: Fri Sep 18, 2020 8:02 am
Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Therefore I am looking to place a little money in high risk/ high reward investments.
Good thoughts from vineviz above but to flesh it out a bit more, while UPRO is high risk, I don't know that I would call it high reward. This thread's 1st post has a TON of great info on these funds, and actual ways to implement them to get some decent expected returns (albeit much lower than the past).

viewtopic.php?t=272007

While some of the pictures are missing, towards the bottom of the 1st post there is a great image under "Why not just 100% UPRO?"; as you can see, 100% UPRO actually SIGNIFICANTLY underperforms 100% S&P500.

I agree with vineviz that if you are looking for an evidence-based way to increase expected return that a fund with value or value/small factor exposure is the way to go and VIOV as mentioned is a great low-cost fund to gain exposure there. I personally have most of my portfolio in similar funds.
VIOV has underperformed the sp500 since its inception. What is the evidence for increased expected returns?
MotoTrojan
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Re: Thoughts about Leveraged ETF's

Post by MotoTrojan »

potatopancake wrote: Fri Sep 18, 2020 8:26 am
MotoTrojan wrote: Fri Sep 18, 2020 8:02 am
Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Therefore I am looking to place a little money in high risk/ high reward investments.
Good thoughts from vineviz above but to flesh it out a bit more, while UPRO is high risk, I don't know that I would call it high reward. This thread's 1st post has a TON of great info on these funds, and actual ways to implement them to get some decent expected returns (albeit much lower than the past).

viewtopic.php?t=272007

While some of the pictures are missing, towards the bottom of the 1st post there is a great image under "Why not just 100% UPRO?"; as you can see, 100% UPRO actually SIGNIFICANTLY underperforms 100% S&P500.

I agree with vineviz that if you are looking for an evidence-based way to increase expected return that a fund with value or value/small factor exposure is the way to go and VIOV as mentioned is a great low-cost fund to gain exposure there. I personally have most of my portfolio in similar funds.
VIOV has underperformed the sp500 since its inception. What is the evidence for increased expected returns?
There is no such thing as something that outperforms in every period, if it did, it would be arbitraged away until the premium was erased. It has been a rough few years for value with some metrics showing this as the worst drawdown since the great depression era.

https://www.twocenturies.com/blog/2020/ ... er-history

If you are set on using actual funds and unwilling to trust the much longer history of value outperformance (much of Buffet's outperformance can be explained by factors), then I would suggest DFSVX as a proxy for VIOV. Returns are about tied right now, although that is during a historical drawdown in value and high valuation for the broad market. If you look at rolling 15-year returns you'll also see a very handsome outperformance for small-value.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

If you are genuinely asking because you aren't familiar with factor investing (small, value, momentum, etc...) then there are countless blogs, podcasts, papers that I could point you towards.

A retiree withdrawing 4% inflation adjusted with just a 25% small-value tilt actually came out well ahead since inception of DFSVX.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Flashes1
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Re: Thoughts about Leveraged ETF's

Post by Flashes1 »

I'd like to pose this scenario to the board:

* I have a Roth IRA that comprises less than 1.0% of my retirement funds.
* I'm looking for a little extra boost to my portfolio (and maybe something different/exciting).
* If I believe the S&P 500 is going to exceed 0% in the next 1, 3, and 5 year period AND I don't necessarily need these funds in the next 10 years-----what are the danger/risk in putting this ROTH in UPRO?
* Can I lose more than 100% of my investment and be subject to margin calls?
Last edited by Flashes1 on Fri Sep 18, 2020 9:56 am, edited 1 time in total.
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vineviz
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Re: Thoughts about Leveraged ETF's

Post by vineviz »

potatopancake wrote: Fri Sep 18, 2020 8:26 am VIOV has underperformed the sp500 since its inception. What is the evidence for increased expected returns?
MotoTrojan has walked through a more detailed analysis, but in many ways the mere fact that "VIOV has underperformed the sp500 since its inception" is, itself, very strong "evidence for increased expected returns".

Leaving aside the academic discussions around mean reversion in stock returns, you could assume many worse prior probability distributions than one which simply predicts that assets with poor recent past performance have higher expected returns than ones with great recent past performance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
alex_686
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Re: Thoughts about Leveraged ETF's

Post by alex_686 »

Welcome to the forum!
vineviz wrote: Fri Sep 18, 2020 7:57 am I'm not sure I'd put a daily leveraged ETF like UPRO into the "high risk/high reward" category. It's a niche tool with a specific purpose, and even calling it an "investment" is arguably a stretch.
To extend a bit, I want to emphasis the 'daily' part of Vineviz's post. Returns are path dependent. There are fact patterns where the S&P is up and UPRO will be down. It is not like you are leveraging up 3x on the S&P. So returns will diverge. IIRC, the hedge effectiveness of ProShares UltraPro Short S&P 500 ETF (SPXU) decays by about 50% over 90s days.

I have read strategies about using leveraged stock and treasury ETFs with monthly rebalancing to get a modest increase in both returns and Shapre ratio. However, I am skeptical. Partly because when I was a young investor I was sitting on the margin desk during the dot.com boom and bust.

Here are my suggestions, in order.

1. Write up your IPS. Being young does not mean you can or should load up on risk. At the very least you should figure out the maximum limit of risks you can take. Maybe you portfolio can take a few dings. However, you don't want to drive your portfolio over a cliff.

Now we are on to things in increasing levels of risk and silliness. Valid options but I am not exactly giving you a thumbs up here.

2. Go to 100% stocks, 0% bonds.

3. Skew your portfolio towards high Beta stocks. Think risky tech companies. Before you do that, read up on the Low Beta (Low Volatility) factor and why it has been outpacing the market.

4. Select individual stocks. Yes, this goes against the grain of Bogleheads and requires a fair amount of work. But it is a better option than leveraged ETFs. In honesty, this is where I went and where I suggest that you go. You are young and can make mistakes. You will make mistakes. So go out and make mistakes and learn from them.

5. Do not go on margin, futures, or options. These are great investments, expect they are like a chain saw without a safety guard. They are a great way to drive your portfolio off a cliff.

In a different dimensions, you could buy real estate with a minimum amount down to leverage up your portfolio.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Thoughts about Leveraged ETF's

Post by alex_686 »

Flashes1 wrote: Fri Sep 18, 2020 9:43 am * If I believe the S&P 500 is going to exceed 0% in the next 1, 3, and 5 year period AND I don't necessarily need these funds in the next 10 years-----what are the danger/risk in putting this ROTH in UPRO?
That UPRO will underperform the S&P 500.

You have to make a additional assumption that volatility will be low for the next 1, 3, and 5 years for UPRO to outpreform.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Thoughts about Leveraged ETF's

Post by pkcrafter »

Welcome Alexander,

Please scroll down in this link and read Nisiprius' post--

viewtopic.php?t=304761


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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vineviz
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Re: Thoughts about Leveraged ETF's

Post by vineviz »

Flashes1 wrote: Fri Sep 18, 2020 9:43 am I'd like to pose this scenario to the board:

* I have a Roth IRA that comprises less than 1.0% of my retirement funds.
* I'm looking for a little extra boost to my portfolio (and maybe something different/exciting).
* If I believe the S&P 500 is going to exceed 0% in the next 1, 3, and 5 year period AND I don't necessarily need these funds in the next 10 years-----what are the danger/risk in putting this ROTH in UPRO?
The danger/risk is that you could be completely correct about your statement #3 and get a lower return from UPRO than you get from an unleveraged S&P 500 index fund.

For example, take a look at SSO (UPRO's slightly older brother) from 7/2007 to 6/2012. As of 6/30/2012 the S&P 500 had positive returns over trailing 1, 3, and 5 year periods. The leveraged fund had a cumulative loss of over 37%.

Image

The daily reset of leverage in funds like this means that high volatility will cause them to underperform the underlying asset even when the underlying asset has positive long-term returns. UPRO isn't a pure leveraged bet on the average return of the S&P 500, but rather is a complex joint bet on the average return of the S&P 500 and the variance and convexity of those returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Thoughts about Leveraged ETF's

Post by nisiprius »

(Vineviz scooped me. Read his posting. But I've spent too much time on this not to post it).

The biggest problem with them is that they simply do not do what many people think they do. This is enough of a problem that FINRA, the financial industry's self-regulating body, has issued a warning about the products, and the SEC and FINRA believe
individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).
Leveraged ETFs may be a legitimate tool for sophisticated investors who are doing financial engineering within their personal portfolios.

Test yourself to see whether you know enough to be considering investing in leveraged ETFs.

ULPIX, the Profunds UltraBull Fund, is a 2X leveraged S&P 500 fund, and one of the oldest products of its kind. Thus, it gives us the longest-term view of what has happened in the real world with this kind of product. It's stated goal is to double the daily returns of the S&P 500 and if you examine it closely you will find that it has met that stated goal quite faithfully.

And yet.

If you had invested $10,000 in ULPIX on 11/26/1997 and I had invested $10,000 into a plain, unleveraged S&P 500 index fund on the same day, I would, today, have more money than you. And I would have experienced far less risk. 2008-2009, I was agonizing because my stock fund dropped -50%, losing half its value. But ULPIX dropped -80%, losing all but a fifth of its value. That put it so far behind that a decade later it has still not caught up.

Source

Image

So here are the questions.

1) Are you surprised, or did you already know this?

2) Looking overall at the two curves, which one would you have preferred to experience in your own account, blue or orange? Do you honestly have believed you would have been able to set there and do nothing at all while you lost 4/5ths of your money, and then patiently waited long enough to recoup and then long enough to match the unleveraged fund?

3) Do you understand how and why this happened?

If you were surprised and do not understand, then begin by reading at least these two articles. These are potentially very risky investments, you really need to know what you are doing before you risk your money in them. Do not treat this casually.

Leveraged and inverse ETFs

FINRA Investor Alert--Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
Last edited by nisiprius on Fri Sep 18, 2020 11:23 am, edited 1 time in total.
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Re: Thoughts about Leveraged ETF's

Post by abuss368 »

Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Hello all,

I wouldnlilento know what were your thoughts on leveraged ETF's (pros and cons) such as UPRO. I am a relatively young investor. Therefore I am looking to place a little money in high risk/ high reward investments. Also if you know any Index funds that fall in this category. Please share. And state what you like about it.

I appreciate it.

Thank you for reading.
Many years ago when I traded individual stocks I speculated in SDS and there was another ETF that I don’t recall. Essentially they were 3x inverse betting on a stock market drop. This was during the Great Recession.

It was an insane and volatile ride.

I would avoid and focus on total market index funds.
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Re: Thoughts about Leveraged ETF's

Post by hnd »

i have a friend who goes back and forth with UPRO and SPXU which is an inverse 3x sp500 leveraged fund. He basically matches his index funds in his IRA So in my opinion its not worth the headache.

I am slightly leveraged in 2 funds/etfs. PSLDX which is leveraged into bonds. and NTSX which is a wisdom tree 60/90 fund. 50% of it is leveraged into bonds. These only make up 5% of my total portfolio though. I also fooled around with ATACX for a few years but it was so volatile even I couldn't handle it.
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Re: Thoughts about Leveraged ETF's

Post by cos »

Vineviz and Nisiprius already provided you with wonderful responses, but I just want to provide one counterpoint. So long as you rebalance frequently (e.g. monthly), you can actually use daily releveraged ETFs to achieve mild levels of overall leverage at a reasonable price. You're obviously better off using options directly or even mild amounts of (cheap) margin, but if you don't want to deal with all of that yourself, daily releveraged ETFs ain't half bad.

See: https://www.portfoliovisualizer.com/bac ... ion4_3=-50
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Re: Thoughts about Leveraged ETF's

Post by annu »

Like normal folks just buy the lotto when prize goes above 200 million :-)
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Re: Thoughts about Leveraged ETF's

Post by Wiggums »

A leveraged ETF is not for me. Nor will you find me day trading. Time in the market and not logging into my account often has served me well.

My children both have brokerage accounts and they are off to a great start.
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Re: Thoughts about Leveraged ETF's

Post by AnilG »

As with any investment, best thing you can do is to educate yourself about the investment. In the main thread about Leveraged ETFs (LETF), someone recommended two books, the first few chapters of both books were very valuable in my understanding of LETFs. Even before delving into LETFs, I am glad that I read these books.
  • Narat Charupat & Peter Miu, Leveraged Exchange Traded Funds, A Comprehensive Guide to Structure, Pricing, and Performance, MacMillan 2016
  • Tim Leung & Marco Santoli, Leveraged Exchange Traded Funds, Price Dynamics and Options Valuation, Springer 2016
After reading these books and few other published papers, and extensive backtesting, I opened a very small position (< 1% of NW in TQQQ+TMF).
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Re: Thoughts about Leveraged ETF's

Post by ohboy! »

abuss368 wrote: Fri Sep 18, 2020 10:42 am
Alexander.c wrote: Thu Sep 17, 2020 10:22 pm Hello all,

I wouldnlilento know what were your thoughts on leveraged ETF's (pros and cons) such as UPRO. I am a relatively young investor. Therefore I am looking to place a little money in high risk/ high reward investments. Also if you know any Index funds that fall in this category. Please share. And state what you like about it.

I appreciate it.

Thank you for reading.
Many years ago when I traded individual stocks I speculated in SDS and there was another ETF that I don’t recall. Essentially they were 3x inverse betting on a stock market drop. This was during the Great Recession.

It was an insane and volatile ride.

I would avoid and focus on total market index funds.
Me too. Was also buying AQG (ultra silver). Had no idea what I was doing and that holding those ETFs for more than a day was borderline idiotic.
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