siamond wrote: ↑
Wed Dec 11, 2019 6:34 pm
HEDGEFUNDIE wrote: ↑
Wed Dec 11, 2019 3:31 pm
Uncorrelated wrote: ↑
Wed Dec 11, 2019 12:30 pm
For Ultra S&P500, we find that (leverage - common_stock) * swap_spread is equal to (2 - .72) * .38% = 0.4864%. Siamond used a curve fitting method to arrive at the figure 0.5%.
For UltraPro S&P500, we find that (leverage - common stock) * swap_spread is equal to (2 - .58) * .42% = 1.0164%. Siamond used a curve fitting method to arrive at the figure 1%.
We still have to look into simulating LETF's with daily math and taking a closer look at the equations for inverse ETF's, but I think the friction cost mystery is solved.
Very nice work! So there are no more mystery costs to these LETFs. 1% ER + 1% Swap Spread + risk-free-rate is it.
Can I ask you to run a chart for TMF?
Well, this does seem like good progress (cool work, Uncorrelated!), but we need to dig a bit further:
- why did we need such a 0.5%/1% adjustment for S&P 500 2x/3x while we didn't need any adjustment for the ST/IT/LT Treasuries models?
- why did we need the same 0.5%/1% for S&P Midcap, but only a much smaller adjustment for Russell 2k (small-caps)?
- then there is the case of International and Gold, but here I suspect there are other considerations piling up, so... one thing at a time.
- and... how do we extend such logic in the past? Should we keep 0.5% and 1% as a constant adjustment as we did so far (not knowing any better!), or is the right number a function of other circumstances?
In any case, GREAT progress!
We can answer some of these questions:
It appears that the long swap spread on treasuries (2x) is sub-zero (around -0.10%) in the time period examined, so no adjustment is necessary.
For Ultra (2x) S&P, MidCap400 and Russell2000, the average swap spread on the long leg is 0.38%, 0.28% and -0.04% (!) respectively. That seems to indicate there is no adjustment necessary for Russel2000.
For UltraPro (3x), figures are 0.42%, 0.36%, -0.01%. This again seems to indicate no adjustment is necessary for Russel2000.
I don't have the data on gold currently but will get to it eventually. Here are a few data points:
as per December 31, 2017, the overnight LIBOR is 1.4% and the swap rate is 2.29%, spread = 0.9%.
as per December 31, 2018, the overnight LIBOR is 2.4% and the swap rate is 3%, spread = 0.4%.
ProShares Ultra Gold holds no common stock, all their exposure comes from the swaps and futures contracts. To arrive at the total friction costs we need to multiply these numbers by 200%, which results in 1.8% in 2017 and 0.8% in 2018. Your excel sheet appears to use friction costs of 1.4%, which is in the right ballpark. (more data is needed to confirm, but I'm not seeing anything that makes me doubt my methodology).
We should be careful drawing conclusions for international funds. VXUS (vanguard international ex-us) has around 0.07% unavoidable internal withholding tax leakage that can be completely avoided by funds (and banks) domiciled in the Netherlands. The tax leakage on individual countries can be far higher. This may or may not be reflected in the swap rate. All this information is included in the annual reports, but you have to know where to look... Looking at US funds that invest only in the US makes the situation far simpler because you can assume the taxes as the fund level are basically identical for swaps, futures and common stock.
siamond wrote: ↑
Wed Dec 11, 2019 11:45 pm
Uncorrelated wrote: ↑
Wed Dec 11, 2019 4:41 pm
Additionally, we don't know what the swap rates were during the great recession or dot-com bubble. We should look into some of the longer running LETF's to observe how rates behave when the markets are more volatile.
ULPIX (2x S&P 500) has history since 1998... Would be a great candidate. Note that its Expense Ratio is higher than the usual culprits.
Any way you could put the raw numbers you collected in a simple sharable spreadsheet?
The SEC website is currently broken, but I will look into ULPIX when it's back up again.
I will deliver data files for you to play with later today.