[Leveraged ETFs vs. Bogleheads Investment Philosophy]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
Tyler Aspect
Posts: 1417
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

[Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by Tyler Aspect » Sat Sep 07, 2019 8:38 pm

[Title was "Leveraged ETF messages" --admin LadyGeek]

(Original question in the moderation forum)

Recently there are many messages posting about the use of 3X leveraged ETFs. They are no longer limited to few theory threads, but can be found in messages asking for portfolio suggestions. Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments, but there are no forum policy stating how leveraged ETF postings should be seen.

It is not my role for every instance of such postings to submit a counter "it is dangerous" message. But this could be a tough issue no matter if one stays silent or engage in arguments.

Has this issue being raised to the moderation team before?

---
(Thread moved to "Theory, News & General forum)

I originally asked this question in the moderation forum, and LadyGeek has assured us that there will not be censorship in the Bogleheads forums.

This thread is now is the "Theory, News & General" forum with a new message title. I and others can now use this thread to discuss the suitability of leveraged ETFs.
Last edited by Tyler Aspect on Tue Sep 10, 2019 10:50 am, edited 1 time in total.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

HEDGEFUNDIE
Posts: 3267
Joined: Sun Oct 22, 2017 2:06 pm

Re: Leveraged ETF messages

Post by HEDGEFUNDIE » Sat Sep 07, 2019 9:00 pm

It “is not your role” but you will brazenly suggest censorship anyway?

I mean, I wouldn’t be shocked if Bogleheads banned talk of LETFs, given that Vanguard banned them a few months ago.

If the mods do decide this, it will be my last day on the site.

User avatar
ThereAreNoGurus
Posts: 294
Joined: Fri Jan 24, 2014 11:41 pm

Re: Leveraged ETF messages

Post by ThereAreNoGurus » Sat Sep 07, 2019 9:02 pm

HEDGEFUNDIE wrote:
Sat Sep 07, 2019 9:00 pm
It “is not your role” but you will brazenly suggest censorship anyway?

I mean, I wouldn’t be shocked if Bogleheads banned talk of LETFs, given that Vanguard banned them a few months ago.

If the mods do decide this, it will be my last day on the site.
Famous last words, but I have faith in the mods.
Trade the news and you will lose.

User avatar
whodidntante
Posts: 6095
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Leveraged ETF messages

Post by whodidntante » Sat Sep 07, 2019 9:04 pm

I guess I'm wondering why this bothers the OP. I like it when people have original thoughts and try to support them. Belief systems can withstand pressure testing if they are any good.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: Leveraged ETF messages

Post by JoMoney » Sat Sep 07, 2019 9:08 pm

HEDGEFUNDIE wrote:
Sat Sep 07, 2019 9:00 pm
...
If the mods do decide this, it will be my last day on the site.
That would certainly make enforcing it easy :P

But seriously, there are lots of disagreements about investment products around here. Going around deleting things we disagree with and pretending the products don't exist isn't helping anything.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
nisiprius
Advisory Board
Posts: 38940
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Leveraged ETF messages

Post by nisiprius » Sat Sep 07, 2019 9:09 pm

I don't speak for forum management--the "advisory board" is basically a committee for handling appeals from moderator action--but I don't see anything in the forum policies prohibiting posting "dangerous" investment ideas. There's a tiny-print disclaimer on every Forum web page saying "No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation."

Anything beyond that is left to the free market in ideas--and whatever influence there might be from the forum's banner, "Investing Advice Inspired by Jack Bogle."

(For all I know, attempting to moderate the quality of the investment advice might even be legally hazardous to the forum, because if the forum had a policy of filtering posts based on quality of advice, it might imply that the forum administrators were taking responsibility for what's being posted).

We do have a Wiki article, Inverse and leveraged ETFs, which opens with the plain warning
Inverse and leveraged ETFs are not suitable for Boglehead-style (buy and hold) investing. In fact, they are not suitable for investing at all - only for short-term "trading" (speculation) which is clearly stated by the fund provider. Please read the FINRA alert, Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors.
(The article also includes an opposing point of view).
Last edited by nisiprius on Sat Sep 07, 2019 9:20 pm, edited 10 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
LadyGeek
Site Admin
Posts: 56330
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Leveraged ETF messages

Post by LadyGeek » Sat Sep 07, 2019 9:10 pm

The purpose of the moderation team is to enforce the Forum Policies as directed by the site owners. Forum policy does not restrict discussions to the Bogleheads investment philosophy, so this is not the job of the moderation team.

Leveraged ETFs is one of many approaches that do not align with the Bogleheads® investment philosophy. For example, tilting, Slice and dice, and the ever popular factor-based investing discussions.

The best approach is to provide a counterpoint to the current discussion. Explain why you think the alternative approach won't work and state your concerns objectively. Yes, you need to be repetitive. Staying silent won't help.

Healthy debates with strong opposing views are encouraged, as everyone learns from the discussion. If the discussion gets emotional (see: General Etiquette), the moderation team will definitely step-in.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

pepys
Posts: 24
Joined: Mon Nov 12, 2018 10:34 am

Re: Leveraged ETF messages

Post by pepys » Sat Sep 07, 2019 9:26 pm

Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: Leveraged ETF messages

Post by JoMoney » Sat Sep 07, 2019 9:43 pm

pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
Specifically for long-term investing it's irresponsible, or at least so says FINRA, SEC, likely your brokerage too, and the prospectus for the ETF.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
jh
Posts: 1796
Joined: Mon May 14, 2007 11:36 am
Location: USA
Contact:

Re: Leveraged ETF messages

Post by jh » Sat Sep 07, 2019 9:46 pm

Its insulting to me when someone I don't even know wants to prevent me from having access to information. The assumption is that I am not smart enough or mature enough to have access to it. Its extremely arrogant for someone to decide on their own what strangers can/should be able to read about.
Last edited by jh on Mon Sep 09, 2019 3:06 pm, edited 1 time in total.

pepys
Posts: 24
Joined: Mon Nov 12, 2018 10:34 am

Re: Leveraged ETF messages

Post by pepys » Sat Sep 07, 2019 9:47 pm

JoMoney wrote:
Sat Sep 07, 2019 9:43 pm
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
Specifically for long-term investing it's irresponsible, or at least so says FINRA, SEC, likely your brokerage too, and the prospectus for the ETF.
Where did FINRA say it's irresponsible?

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: Leveraged ETF messages

Post by JoMoney » Sat Sep 07, 2019 9:52 pm

pepys wrote:
Sat Sep 07, 2019 9:47 pm
JoMoney wrote:
Sat Sep 07, 2019 9:43 pm
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
Specifically for long-term investing it's irresponsible, or at least so says FINRA, SEC, likely your brokerage too, and the prospectus for the ETF.
Where did FINRA say it's irresponsible?
https://www.sonnlaw.com/faq/exchange-tr ... nds-risks/
Recent FINRA Actions Involving Unsuitable Investments in Non-traditional ETFs
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

ohai
Posts: 989
Joined: Wed Dec 27, 2017 2:10 pm

Re: Leveraged ETF messages

Post by ohai » Sat Sep 07, 2019 9:57 pm

JoMoney wrote:
Sat Sep 07, 2019 9:43 pm
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
Specifically for long-term investing it's irresponsible, or at least so says FINRA, SEC, likely your brokerage too, and the prospectus for the ETF.
None of these says leveraged ETFs are "irresponsible", as far as I know. They say that those instruments are not intended for long term investing. However, there is compelling evidence that leveraged ETFs can be used successfully for long term investing, especially if combined with other investments. The fact that leveraged ETFs are designed for day trading doesn't mean that customers cannot find other, valid uses for them.

If you have a study that demonstrates failure of modest leverage (let's say 1.5x to 2.0x) over a 30 year investment period, particularly with rebalancing with a bond complement allocation, I'd love to see it.

MotoTrojan
Posts: 5829
Joined: Wed Feb 01, 2017 8:39 pm

Re: Leveraged ETF messages

Post by MotoTrojan » Sat Sep 07, 2019 10:01 pm

Why are you against these funds but okay with options/futures talk on the forum? You seem misinformed.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: Leveraged ETF messages

Post by JoMoney » Sat Sep 07, 2019 10:16 pm

ohai wrote:
Sat Sep 07, 2019 9:57 pm
...
None of these says leveraged ETFs are "irresponsible", as far as I know. They say that those instruments are not intended for long term investing. However, there is compelling evidence that leveraged ETFs can be used successfully for long term investing, especially if combined with other investments. The fact that leveraged ETFs are designed for day trading doesn't mean that customers cannot find other, valid uses for them.

If you have a study that demonstrates failure of modest leverage (let's say 1.5x to 2.0x) over a 30 year investment period, particularly with rebalancing with a bond complement allocation, I'd love to see it.
There are numerous examples of brokerages and financial professionals being held to account for the irresponsible recommendation and suitability failures of using these ETFs for long-term investing.
Because of the un-suitability, and the liability, Vanguard's brokerage stopped allowing them to be purchased altogether
https://investornews.vanguard/vanguard- ... vestments/

These leveraged ETF's DO NOT REPRESENT A LEVERAGED INVESTMENT FOR ANYTHING LONGER THAN A SINGLE TRADING DAY.

1.5x to 2.0x leverage IS NOT "modest"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

typical.investor
Posts: 1076
Joined: Mon Jun 11, 2018 3:17 am

Re: Leveraged ETF messages

Post by typical.investor » Sat Sep 07, 2019 10:17 pm

Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments, but there are no forum policy stating how leveraged ETF postings should be seen.
How are ETFs tracking the S&P 500, MSCI EAFE and MSCI Emerging Markets Indexes speculative? What about those indexes make them poor choices?

Is it similarly speculative for people to hold investments while holding a mortgage? Isn't that leverage too?

If I have $100k in 3X leveraged funds, do I have more or less leverage than someone with a $300k mortgage. I don't have, never had and never will have a mortgage.

I have seen exactly zero posts encouraging anyone to trading in and out of 3X leveraged funds here, and I expect most of us 3X holders will jump all over anyone suggesting anything other than buy, hold and rebalance per AA!

In general though, I completely share your concern that people should carefully understand and weigh the potential downside of any investment, and can accept that before investing. A sharp downturn while holding leveraged investments combined with a job loss and need to spend out of a portfolio before it can recover could really hurt one long term.

typical.investor
Posts: 1076
Joined: Mon Jun 11, 2018 3:17 am

Re: Leveraged ETF messages

Post by typical.investor » Sat Sep 07, 2019 10:31 pm

JoMoney wrote:
Sat Sep 07, 2019 10:16 pm

https://investornews.vanguard/vanguard- ... vestments/

These leveraged ETF's DO NOT REPRESENT A LEVERAGED INVESTMENT FOR ANYTHING LONGER THAN A SINGLE TRADING DAY.
So?

Vanguard also writes:
These investments, which are generally incompatible with a buy-and-hold strategy, run counter to this long-term focus.
Not true.

Silly inconsistent and contradictory Vanguard I think.

What about "Vanguard Alternative Strategies Fund (VASFX)"?
The Fund seeks to generate absolute returns independent of market conditions, while managing volatility by combining strategies with different volatility patterns. The Fund is expected to utilize leverage in an attempt to match the expected risk profile of each individual strategy and the fund overall to a targeted level.

The Fund’s strategies involve the use of leverage, so its investment program may be considered speculative and is expected to involve considerable risks. The Fund could lose money at any time and may underperform the markets in which it invests during any given period, regardless of whether such markets rise or fall.
That fund's returns don't exactly correspond to market returns, and neither will a 3X leverage fund due to it's daily reset of leverage. Again, so what?

Yet because VASFX is from Vanguard it's ok? Because it has a high minimum it's ok? What is it that makes VASFX ok? Vanguard's view is pollywog I think.

In general again though, I completely share the concern that people should carefully understand and weigh the potential downside of any investment, and can accept that before investing. A sharp downturn while holding leveraged investments combined with a job loss and need to spend out of a portfolio before it can recover could really hurt one long term.

pepys
Posts: 24
Joined: Mon Nov 12, 2018 10:34 am

Re: Leveraged ETF messages

Post by pepys » Sat Sep 07, 2019 10:51 pm

JoMoney wrote:
Sat Sep 07, 2019 9:52 pm
pepys wrote:
Sat Sep 07, 2019 9:47 pm
JoMoney wrote:
Sat Sep 07, 2019 9:43 pm
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
Specifically for long-term investing it's irresponsible, or at least so says FINRA, SEC, likely your brokerage too, and the prospectus for the ETF.
Where did FINRA say it's irresponsible?
https://www.sonnlaw.com/faq/exchange-tr ... nds-risks/
Recent FINRA Actions Involving Unsuitable Investments in Non-traditional ETFs
That doesn't show what you said at all. It shows brokers and advisors violating FINRA rules by recommending and trading (in customer accounts) in non-traditional etfs without a reasonable basis to do so. They did not meet the customers' risk tolerance and in some cases the advisors did not understand how the funds worked. If you actually read the letters (or their rules), it is very clear that these investments are not always unsuitable. FINRA also gives disciplinary action all the time to advisors who over-allocate to a single stock, bond, or a very specific group of stocks/bonds, and theoretically could even for the S&P 500. That doesn't mean holding the S&P 500 is irresponsible for long-term investing, it means it isn't suitable to only hold it for people with a very low risk-tolerance.

For example: "[The firm] recommended non-traditional ETFs to customers without fully understanding the features and risks associated with those products. The firm allowed its registered representatives to make unsuitable recommendations of non-traditional ETFs to many customers with conservative and moderate investment objectives and risk tolerances, some of whom were elderly."

So they don't even take the position that advisors should never recommend them here, let alone that it's irresponsible for someone to invest their own money into it.

Where does FINRA say it is irresponsible to use a leveraged etf as a small part of a long-term investment strategy? That's the question, and one that is obviously impossible to answer. The SEC and the prospectus also do not take that position.

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: Leveraged ETF messages

Post by vineviz » Sun Sep 08, 2019 6:45 am

pepys wrote:
Sat Sep 07, 2019 10:51 pm
For example: "[The firm] recommended non-traditional ETFs to customers without fully understanding the features and risks associated with those products. The firm allowed its registered representatives to make unsuitable recommendations of non-traditional ETFs to many customers with conservative and moderate investment objectives and risk tolerances, some of whom were elderly."

So they don't even take the position that advisors should never recommend them here, let alone that it's irresponsible for someone to invest their own money into it.
+1

A leveraged S&P 500 ETF is to an unleveraged S&P 500 ETF as a sledgehammer is to a tack hammer: unquestionably more powerful, possibly the wrong tool for the job, and totally useful when used appropriately.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
LadyGeek
Site Admin
Posts: 56330
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by LadyGeek » Sun Sep 08, 2019 8:09 am

This thread is now in the Investing - Theory, News & General forum (general discussion). I also retitled the thread.

As a reminder, see: General Etiquette
This is a moderated forum. We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

Discussions are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them.

At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.

If you feel that someone has attacked you or otherwise violated the policies of this forum, do not respond in kind. Instead, please click the report button on the offending post. This is the quickest method to notify the site moderators.

Remember that you can edit your own posts even after submitting them, so comments made in anger or haste can be rephrased before the problem escalates or a moderator has to step in.
In addition to enforcing the forum policies, a moderator's role is to ensure discussions stay focused.

This discussion is a debate of "Leveraged ETFs" vs. "Bogleheads investment philosophy".
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
Nate79
Posts: 4896
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by Nate79 » Sun Sep 08, 2019 9:00 am

I disagree that leveraged ETFs are absolutely against the Bogleheads investment philosophy. Holding debt is also leverage but I don't see it banned from discussions neither.

schismal
Posts: 108
Joined: Sat Apr 13, 2019 8:53 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by schismal » Sun Sep 08, 2019 9:03 am

Censorship to would be a disturbing trend. Do we next ban discussion of factor tilting? Delete the NTSX thread? Forbid talk of margin accounts and futures?

This forum has little reason to exist if everyone holds the same 3 funds.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by JoMoney » Sun Sep 08, 2019 9:10 am

Nate79 wrote:
Sun Sep 08, 2019 9:00 am
I disagree that leveraged ETFs are absolutely against the Bogleheads investment philosophy. Holding debt is also leverage but I don't see it banned from discussions neither.
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
https://www.finra.org/rules-guidance/ke ... al-etf-faq
Because they reset each day, leveraged and inverse ETFs typically are inappropriate as an intermediate or long-term investment. They may be appropriate, however, if recommended as part of a sophisticated trading or hedging strategy that will be closely monitored by a financial professional. At times, these strategies might justify a decision to hold a leveraged or inverse ETF longer than one day. However, a registered representative must carefully address the question of how to engage in these strategies in a manner consistent with the suitability rule.

...

Of particular concern, in light of their reset feature, is whether one is recommended as an intermediate or long-term investment rather than as part of a closely monitored trading or hedging strategy.
Last edited by JoMoney on Sun Sep 08, 2019 9:14 am, edited 1 time in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Forester
Posts: 360
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by Forester » Sun Sep 08, 2019 9:11 am

In 2019 a leveraged equity ETF is more conservative than a bond fund :sharebeer

User avatar
willthrill81
Posts: 12625
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Leveraged ETF messages

Post by willthrill81 » Sun Sep 08, 2019 9:24 am

pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
A large swath of the posters here are in favor of retaining a mortgage in order to bolster their investments. That could be a riskier form of leverage than a leveraged ETF. Yet for some reason, this form of leverage does not conflict the Boglehead investment philosophy, though I don't really understand why. The consequences are not always the same, but leverage is leverage and nearly always increases an investor's risk.

Who is at greater risk, an investor with a mortgage and equivalent sized portfolio invested 100% in stocks or an investor with no debt at all who has 10% of their portfolio in leveraged ETFs? Why should one 'fit' within the Boglehead philosophy but not the other?
Last edited by willthrill81 on Sun Sep 08, 2019 9:26 am, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by vineviz » Sun Sep 08, 2019 9:26 am

JoMoney wrote:
Sun Sep 08, 2019 9:10 am
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
It’s only “unexpected” if you don’t know how they work.

And they are aren’t complicated or difficult to figure out.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by JoMoney » Sun Sep 08, 2019 10:08 am

vineviz wrote:
Sun Sep 08, 2019 9:26 am
JoMoney wrote:
Sun Sep 08, 2019 9:10 am
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
It’s only “unexpected” if you don’t know how they work.

And they are aren’t complicated or difficult to figure out.
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.
Any way around it though, outside the world of internet bloggers and forums, it is irresponsible to suggest using these as a long-term holding, which is why everyone with a responsibility to ensure "suitability" including the products own prospectus caution against it as a long-term holding, and financial professionals have been held to account for suggesting to do so.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
willthrill81
Posts: 12625
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by willthrill81 » Sun Sep 08, 2019 10:13 am

JoMoney wrote:
Sun Sep 08, 2019 10:08 am
Any way around it though, outside the world of internet bloggers and forums, it is irresponsible to suggest using these as a long-term holding, which is why everyone with a responsibility to ensure "suitability" including the products own prospectus caution against it as a long-term holding, and financial professionals have been held to account for suggesting to do so.
Is anyone here actually recommending these to investors? There is discussion about how they could be used, but I haven't seen anyone here suggesting that anyone else put a penny into a leveraged ETF.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

HEDGEFUNDIE
Posts: 3267
Joined: Sun Oct 22, 2017 2:06 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by HEDGEFUNDIE » Sun Sep 08, 2019 10:18 am

JoMoney wrote:
Sun Sep 08, 2019 10:08 am
vineviz wrote:
Sun Sep 08, 2019 9:26 am
JoMoney wrote:
Sun Sep 08, 2019 9:10 am
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
It’s only “unexpected” if you don’t know how they work.

And they are aren’t complicated or difficult to figure out.
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.
Any way around it though, outside the world of internet bloggers and forums, it is irresponsible to suggest using these as a long-term holding, which is why everyone with a responsibility to ensure "suitability" including the products own prospectus caution against it as a long-term holding, and financial professionals have been held to account for suggesting to do so.
The theoretical principles behind why a leveraged stock/bond combination works as a long term holding are the same as the principles that underpin the “suitability” of any regular stock/bond AA. In both cases, you rely on two assets that do not move together to take you through both the good times and the bad.

PSLDX has been found “suitable” enough to be allowed into 401k menus.

rascott
Posts: 682
Joined: Wed Apr 15, 2015 10:53 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by rascott » Sun Sep 08, 2019 10:20 am

JoMoney wrote:
Sun Sep 08, 2019 10:08 am
vineviz wrote:
Sun Sep 08, 2019 9:26 am
JoMoney wrote:
Sun Sep 08, 2019 9:10 am
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
It’s only “unexpected” if you don’t know how they work.

And they are aren’t complicated or difficult to figure out.
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.
Any way around it though, outside the world of internet bloggers and forums, it is irresponsible to suggest using these as a long-term holding, which is why everyone with a responsibility to ensure "suitability" including the products own prospectus caution against it as a long-term holding, and financial professionals have been held to account for suggesting to do so.
There are months long threads, running thousands of posts, where these products were simulated going back 60+ years, as part of a long-term hold. It's up to the individual to determine the risk level they feel is appropriate.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by JoMoney » Sun Sep 08, 2019 10:25 am

HEDGEFUNDIE wrote:
Sun Sep 08, 2019 10:18 am
...
The theoretical principles behind why a leveraged stock/bond combination works as a long term holding are the same as the principles that underpin the “suitability” of any regular stock/bond AA. In both cases, you rely on two assets that do not move together to take you through both the good times and the bad.

PSLDX has been found “suitable” enough to be allowed into 401k menus.
Neither PSLDX nor "theoretical principles of leveraged stock/bond combinations" suggest using Leveraged ETF's as a long-term holding, and I don't see the relevance to my point. Specifically, that it's irresponsible to suggest using leveraged ETFs as a long-term holding and expecting it to work like other forms of leverage.
Last edited by JoMoney on Sun Sep 08, 2019 10:28 am, edited 1 time in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
305pelusa
Posts: 558
Joined: Fri Nov 16, 2018 10:20 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by 305pelusa » Sun Sep 08, 2019 10:28 am

vineviz wrote:
Sun Sep 08, 2019 9:26 am
JoMoney wrote:
Sun Sep 08, 2019 9:10 am
The leveraged ETF's being discussed don't represent traditional forms of leveraged stocks. They're a unique product meant to track the daily movements , and reset daily. They're impacted by volatility in some unexpected ways.
It’s only “unexpected” if you don’t know how they work.

And they are aren’t complicated or difficult to figure out.
Leverage in general (and these products specifically) can be quite complicated and difficult to figure out. I'm surprised you don't agree; seeing as how it's only been 6 months since you seemed confused by these concepts back in my thread:
viewtopic.php?p=4435999#p4435999

Whoever uses these should really understand the implication of buying a product that "buys high/sells low". And if you utilize leverage strategies that do not, you must be aware of how quickly leverage can increase after market downturns.

HEDGEFUNDIE
Posts: 3267
Joined: Sun Oct 22, 2017 2:06 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by HEDGEFUNDIE » Sun Sep 08, 2019 10:39 am

JoMoney wrote:
Sun Sep 08, 2019 10:25 am
HEDGEFUNDIE wrote:
Sun Sep 08, 2019 10:18 am
...
The theoretical principles behind why a leveraged stock/bond combination works as a long term holding are the same as the principles that underpin the “suitability” of any regular stock/bond AA. In both cases, you rely on two assets that do not move together to take you through both the good times and the bad.

PSLDX has been found “suitable” enough to be allowed into 401k menus.
Neither PSLDX nor "theoretical principles of leveraged stock/bond combinations" suggest using Leveraged ETF's as a long-term holding, and I don't see the relevance to my point. Specifically, that it's irresponsible to suggest using leveraged ETFs as a long-term holding and expecting it to work like other forms of leverage.
https://www.portfoliovisualizer.com/bac ... 0&total3=0

This backtest actually understates the similarity between daily reset and non-daily reset leveraged strategies, as:

1. PSLDX actually holds a basket of actively managed corporate bonds, not Treasuries.

2. The LETF portfolio is set to rebalance monthly. If avoiding volatility drag is the goal, you could rebalance those weekly or even daily.
Last edited by HEDGEFUNDIE on Sun Sep 08, 2019 10:56 am, edited 3 times in total.

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by vineviz » Sun Sep 08, 2019 10:42 am

[quote=JoMoney post_id=4739497 time=1567955327 user_id=46324
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.[/quote]

You seem to be worried that some people might use them in ways you don't approve of, which is an opinion I see no value in debating.

The only thing I can encourage to to do is to avoid the classic mistake of fallacy of composition, which is mistaking the characteristics of the assets as being representative of the portfolio.

For example, is there any sense in which Portfolio 1 in the following comparison is "more risky" than Vanguard Target Retirement 2050 (VFIFX)?

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by vineviz » Sun Sep 08, 2019 10:43 am

305pelusa wrote:
Sun Sep 08, 2019 10:28 am
Leverage in general (and these products specifically) can be quite complicated and difficult to figure out.
Do you really think that an allocation of 101% stocks is fundamentally different than an allocation of 99% stocks? So different that it is an entirely different approach to investing?

I certainly don't think so.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
305pelusa
Posts: 558
Joined: Fri Nov 16, 2018 10:20 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by 305pelusa » Sun Sep 08, 2019 10:57 am

vineviz wrote:
Sun Sep 08, 2019 10:43 am
305pelusa wrote:
Sun Sep 08, 2019 10:28 am
Leverage in general (and these products specifically) can be quite complicated and difficult to figure out.
Do you really think that an allocation of 101% stocks is fundamentally different than an allocation of 99% stocks? So different that it is an entirely different approach to investing?

I certainly don't think so.
Don't change the subject. You know I leverage and I support it. In fact, for young people, I even recommend it as a way to decrease risk.

But I will be the last person to say it's easy, uncomplicated, or simple to understand. Going to 101% is obviously trivial (everyone with a credit card is probably already there), but once you start to get to 200%+ and need to use products like options, futures, LETFs, or leveraged mutual funds, the learning curve goes up.
Last edited by 305pelusa on Sun Sep 08, 2019 11:02 am, edited 1 time in total.

User avatar
JoMoney
Posts: 7367
Joined: Tue Jul 23, 2013 5:31 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by JoMoney » Sun Sep 08, 2019 10:58 am

vineviz wrote:
Sun Sep 08, 2019 10:42 am
JoMoney wrote:
Sun Sep 08, 2019 10:08 am
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.
You seem to be worried that some people might use them in ways you don't approve of, which is an opinion I see no value in debating.

The only thing I can encourage to to do is to avoid the classic mistake of fallacy of composition, which is mistaking the characteristics of the assets as being representative of the portfolio.

For example, is there any sense in which Portfolio 1 in the following comparison is "more risky" than Vanguard Target Retirement 2050 (VFIFX)?

Image
That's fine, I don't feel compelled to debate your own opinions [edit by Mod. Misenplace] about what you think I think.
Your example doesn't change the fact that leveraged ETFs, even for those who want leverage, are not appropriate long-term holdings, everyone involved with actually offering the products says so, and there are literally the financial industries equivalent of ambulance chasers going after financial professionals who do suggest them as long-term holdings.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

MotoTrojan
Posts: 5829
Joined: Wed Feb 01, 2017 8:39 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by MotoTrojan » Sun Sep 08, 2019 11:10 am

You are making two arguments, one that most would agree with and one that’s just wrong.

1: LETF funds have interesting daily resetting induced volatility decay which some people do not understand.

While this is true, it doesn’t mean that the products are difficult to understand for an intelligent investor. Did you know that a LETF will actually outperform 3x the unleveraged holding in both a strong up AND down market? It only drags in a flatter market. A market that steadily drops 34% will wipe out a 3x futures exposure, but not an LETF.

2: They cannot be appropriately used for longterm holdings.

False. If my goal is to achieve a true 3x exposure then his is correct and futures would be better, but as stated above I understand that is not what’s happening here and that is not alone a reason they can’t be appropriately utilized.

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by vineviz » Sun Sep 08, 2019 11:13 am

JoMoney wrote:
Sun Sep 08, 2019 10:58 am
Your example doesn't change the fact that leveraged ETFs, even for those who want leverage, are not appropriate long-term holdings . . .
Come on. My example illustrates just one use case in which a leveraged ETF is ENTIRELY appropriate as a long-term holding. An example in which a portfolio containing a leveraged ETF is LESS risky than a portfolio that does not.

In other words, context matters.

"Appropriateness" isn't a fact, it's a subjective evaluation. And IMHO the only evaluations worth paying attention to are the ones that take into account all the circumstances, not just some of them. Do you disagree with this?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

HEDGEFUNDIE
Posts: 3267
Joined: Sun Oct 22, 2017 2:06 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by HEDGEFUNDIE » Sun Sep 08, 2019 11:32 am

JoMoney wrote:
Sun Sep 08, 2019 10:58 am
Your example doesn't change the fact that leveraged ETFs, even for those who want leverage, are not appropriate long-term holdings.
You keep claiming “facts” in the face of contrary evidence that you ignore.

User avatar
Topic Author
Tyler Aspect
Posts: 1417
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by Tyler Aspect » Sun Sep 08, 2019 11:58 am

I did some background reading about the history of Long Term Capital Management. During their wind-down period they ran into a problem that some of their copycat competitors had liquidated their holdings ahead of LTCM. LTCM had to sell their holdings at an unattractive price.

In the world of hedge funds there is no need to limit leveraging at 3X. A 4X leveraged hedge fund would have to liquidate their position earlier than a 3X leveraged hedge fund. 5X leveraged fund have to liquidate before the 4X leveraged ones. Is a domino effect possible?

I wonder if these projected liquidation events would present a shock to the general stock market, or the Treasury market.

S&P 500 ETF : VOO
2X leveraged : SSO
3X leveraged : UPRO

ICE 20 year plus ETF : TLT
2X leveraged : UBT
3X leveraged : TMF
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

assetalloc
Posts: 58
Joined: Tue Nov 13, 2018 8:45 pm

Re: Leveraged ETF messages

Post by assetalloc » Sun Sep 08, 2019 12:03 pm

willthrill81 wrote:
Sun Sep 08, 2019 9:24 am
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
A large swath of the posters here are in favor of retaining a mortgage in order to bolster their investments. That could be a riskier form of leverage than a leveraged ETF. Yet for some reason, this form of leverage does not conflict the Boglehead investment philosophy, though I don't really understand why. The consequences are not always the same, but leverage is leverage and nearly always increases an investor's risk.

Who is at greater risk, an investor with a mortgage and equivalent sized portfolio invested 100% in stocks or an investor with no debt at all who has 10% of their portfolio in leveraged ETFs? Why should one 'fit' within the Boglehead philosophy but not the other?
No, they are not talking of 90% cash & 10% leveraged etf, they are talking about ALL leveraged ETFs and dreaming of making $1M in 13 years. Then it won't be 10% of portfolios.

You have to have shelter for you and your family. So you have to either rent or buy. In either case you are keeping your cash dry to invest by borrowing money on your home. Some people prefer to rent in current lofty home markets. The idea of borrowing from mortgage and investing in bogle portfolio is about a managed risk investment, where you have insurance if your house burns down. For leveraged ETFs you have be prepared for 99% value loss, as they have done in 2000 & 2008 (twice in 10 years).

Both 90%+ down drafts have been "studied on paper" by these young investors who have only seen 10 years of very strong bull markets in stocks and bonds. They haven't dealt with other psychological issues that arise when markets fall so rapidly, especially when their $100K initial investment would have ballooned to $1M.

User avatar
willthrill81
Posts: 12625
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Leveraged ETF messages

Post by willthrill81 » Sun Sep 08, 2019 12:10 pm

assetalloc wrote:
Sun Sep 08, 2019 12:03 pm
willthrill81 wrote:
Sun Sep 08, 2019 9:24 am
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
A large swath of the posters here are in favor of retaining a mortgage in order to bolster their investments. That could be a riskier form of leverage than a leveraged ETF. Yet for some reason, this form of leverage does not conflict the Boglehead investment philosophy, though I don't really understand why. The consequences are not always the same, but leverage is leverage and nearly always increases an investor's risk.

Who is at greater risk, an investor with a mortgage and equivalent sized portfolio invested 100% in stocks or an investor with no debt at all who has 10% of their portfolio in leveraged ETFs? Why should one 'fit' within the Boglehead philosophy but not the other?
No, they are not talking of 90% cash & 10% leveraged etf, they are talking about ALL leveraged ETFs and dreaming of making $1M in 13 years. Then it won't be 10% of portfolios.

You have to have shelter for you and your family. So you have to either rent or buy. In either case you are keeping your cash dry to invest by borrowing money on your home. Some people prefer to rent in current lofty home markets. The idea of borrowing from mortgage and investing in bogle portfolio is about a managed risk investment, where you have insurance if your house burns down. For leveraged ETFs you have be prepared for 99% value loss, as they have done in 2000 & 2008 (twice in 10 years).

Both 90%+ down drafts have been "studied on paper" by these young investors who have only seen 10 years of very strong bull markets in stocks and bonds. They haven't dealt with other psychological issues that arise when markets fall so rapidly, especially when their $100K initial investment would have ballooned to $1M.
I haven't seen anyone here say that they were putting 100% of their portfolio into leveraged ETFs nor only S&P 500 3x ETFs.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

samsdad
Posts: 723
Joined: Sat Jan 02, 2016 6:20 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by samsdad » Sun Sep 08, 2019 12:14 pm

Back in the original HF-excellent-adventure thread, I posted this:

viewtopic.php?f=10&t=272007&p=4407878&h ... g#p4407878

In that post I quote from a paper that can be found here: https://www.sciencedirect.com/science/a ... via%3Dihub

Some quotes from that post (and the paper, all emphasis mine):
(samsdad) What is news to me is that apparently the warning about volatility decay (no matter the market conditions) that I've seen beaten to death in other threads, and to a lesser extent here; and the fundamental idea that holding these for more than a few days is dangerous is ostensibly not supported by data from the entire history of the Dow Jones Industrial Average starting in 1896 through 2010, and the S&P 500 data from 1958 through 2010. From the paper (my emphasis in bold):
The poor tracking performance of daily-rebalanced LETPs during the financial crisis of 2007–2009 has led the SEC, FINRA, the financial media, and investment advisors to warn investors that these daily-rebalanced LETPs are not suitable for long-term strategies. However, these comments are not conclusive for at least three reasons. First, because LETPs have a short history, the warnings are based on a small sample. Second, the financial crisis was a unique global event, and generalizations from it should be tempered. Third, a comprehensive framework to determine the effective multiple for LETPs with different rebalancing frequencies over various holding periods has yet to be provided.

To address these points, we test for additional perspectives on the deviations of LETP target returns and multiples from their naively expected counterparts by using more than a century’s history of the Dow Jones Industrial Average (INDU) over various investment horizons. We begin with the daily-rebalanced LETPs, which are designed to deliver a constant daily leverage. Contrary to public criticism, we find that, on average, LETP target returns, over various holding periods, perform largely in line with, and no worse than, their naive expected returns, defined as the product multiple times the cumulative returns of their underlying indices during the holding period. The holding periods include calendar months, calendar years, rolling two days, three days, and up to 2500 trading days.
Further into the paper:
These findings show that if an investor’s investment horizon is one calendar year, on average, the compounding effect is beneficial to the performance of a (2􏰁x) fund. . . . These findings show that the compounding effect is more likely to be positive than negative, and stands in contrast to the popular media assertion that LETPs are not suitable for long-term investors. . . . The rest of Panel B illustrates that this calendar-year positive compounding effect also applies to the (3x) . . . daily-rebalanced LETPs.
And:
Illustratively, for all periods – from two to 2500 trading days – Fig. 1 plots the average cumulative return deviation over the number of holding days by adding one trading day at a time. It shows that the average return deviation is positive for all five daily-rebalanced LETPs. In addition, as the number of holding days increases, the return deviation also increases. These findings confirm the conclusion from Table 1 that the daily-rebalanced LETP compounding effect, on average, can be beneficial to investor performance, which runs counter to media reports and public warnings.
The S&P 500 exhibits the same behavior as the DJIA:
Our results in Table 1 show that the compounding effect, on average, does not negatively impact the performance of the INDU LETFs. One might be concerned, however, that the INDU may not be representative of a broader U.S. stock market. To address this concern, we carry out the same analysis by using the publicly accessible history of the S&P 500 index (SPX). As shown in Table 6, for the holding period of a calendar year or longer, the compounding deviation registers a positive mean, confirming that the compounding deviation enhances LETF performances on average. In addition, the medians of the compounding deviation are also positive, confirming the higher odds of a performance enhancement than not. Overall, the results in Table 6 confirm our findings from Table 1, showing that the compounding effect enhances long-term LETF performances.
And, management fees don't fundamentally change the picture:
As shown in Table 7, the incorporation of the management fee has a small negative impact on the performance of LETPs. However, the fee-adjusted average annual returns of daily-rebalanced LETPs are still higher than their naïve expected counterparts. This confirms that the incorporation of management fees does not change the main conclusion of this paper.
In conclusion:
In summary, using the long-history real-world data on U.S. stock market indices, our research contributes to the academic literature with new insights into LETPs, well beyond the existing studies on daily-rebalanced LETPs that use short-history data or those based on standard normal simulations. Our theoretical framework and empirical findings reveal the determinants of the return deviation and multiple deviation of various LETPs across rebalancing frequencies and holding periods, and hold the promise of guiding regulators, policy makers, and investors in their understanding of the tracking performance of LETPs.
If anyone has any studies that contradict the findings of that paper, I'd be interested in viewing them.

Otherwise, I agree wholeheartedly with jh:
jh wrote:
Sat Sep 07, 2019 9:46 pm
Its insulting to me when someone I don't even know wants to prevent me from having access to information. The assumption is that I am not smart enough or mature enough to have access to it. Its extremely arrogant for someone to decide on their own what strangers can/should be able to read about.
I honestly couldn't agree more.

As far as the aforementioned "ambulance chasers", let me state as a fellow lawyer that I don't think they are on solid ground here, not that I've seen the results of any litigation in this area. Even so, courts get it wrong all the time. I think the same thing about forcing employers to provide 401k plans that have to have index funds. Don't like your employer's 401k plan options? Too bad, find another job.

Let me illustrate the absurdity of the subject. We are all aware that any individual equity could go to zero practically overnight, if not literally so. Does that mean they shouldn't ever be held by individual investors? Should FINRA or some other nanny agency mandate that they come with a BIG WARNING label? Should we here at bogleheads be prevented from discussing them? Does every discussion that doesn't revolve around the three-fund portfolio need to be carefully monitored by ladygeek, et al., so that we don't tread into "danger"?

Individual liberty comes with a price. Mistakes: irreversible, economically-crushing, life-changing mistakes, are embodied in this concept. Contemplating the censorship (or special-disclaimer treatment) of any investing strategy or product is disgusting.

OP, if you want to shout from the rooftops your belief that leveraged ETFs are the greatest danger to the world since __________, in every thread that pops up, by all means do so. But the remedy isn't the removal of their discussion from this forum. To quote the US Supreme Court (who I think gets it wrong regularly), "the remedy to be applied is more speech, not enforced silence." Whitney v. California, 274 U.S. 357 (1927).

I'll reiterate my invitation to the procurement of studies, based on real-life data, that call into question the paper cited above. Feel free to peruse the original HF thread to see additional excerpts in my posts from said paper.

alex_686
Posts: 4814
Joined: Mon Feb 09, 2015 2:39 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by alex_686 » Sun Sep 08, 2019 12:22 pm

Tyler Aspect wrote:
Sun Sep 08, 2019 11:58 am
I did some background reading about the history of Long Term Capital Management. During their wind-down period they ran into a problem that some of their copycat competitors had liquidated their holdings ahead of LTCM. LTCM had to sell their holdings at an unattractive price.
I don't think this is very applicable. The specific situation that I think you are referencing is a special situation where only 3 banks where making a market in a over-the-counter forward. The market was normally illquid, during the crisis even more illiquid, and the banks were taking advantage of this situation and squeezing LTCM hard. IIRC the banks where pricing the futures so high that it implied that the S&P index had a 25% chance of going to zero over the next 10 years. With only 3 counter parties in play, and each counter party knowing what LTCM held, what they were trying to do, and the relative position of the other 3 banks, well......

Back to the original point. I do think that leverage funds can be congruent to Boglehead thinking. Low cost exposure to the index. Many of us here do use leverage - even if it is indirectly via mortgages on property. Even here it is applicable. Theoretical discussion and back-testing of leverage is easier done with leveraged ETFs then with a generic home mortgage problem.

HEDGEFUNDIE
Posts: 3267
Joined: Sun Oct 22, 2017 2:06 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by HEDGEFUNDIE » Sun Sep 08, 2019 1:14 pm

All this talk about how bad leverage is is making me antsy.

I’ve been back and forth about what to rebalance my EDV gains into. Now I’m confident PSLDX is the right place for that money.

pepys
Posts: 24
Joined: Mon Nov 12, 2018 10:34 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by pepys » Sun Sep 08, 2019 1:31 pm

JoMoney wrote:
Sun Sep 08, 2019 10:58 am
vineviz wrote:
Sun Sep 08, 2019 10:42 am
JoMoney wrote:
Sun Sep 08, 2019 10:08 am
I suspect some of the people using these things have only seen the "up" side of the past several years, and have no appreciation for the potential impacts that do not work the way other forms of leverage do, or even a plan for what might happen to someones strategy if/when we see turmoil that causes some of these funds to be closed.
You seem to be worried that some people might use them in ways you don't approve of, which is an opinion I see no value in debating.

The only thing I can encourage to to do is to avoid the classic mistake of fallacy of composition, which is mistaking the characteristics of the assets as being representative of the portfolio.

For example, is there any sense in which Portfolio 1 in the following comparison is "more risky" than Vanguard Target Retirement 2050 (VFIFX)?

Image
That's fine, I don't feel compelled to debate your own opinions [edit by Mod. Misenplace] about what you think I think.
Your example doesn't change the fact that leveraged ETFs, even for those who want leverage, are not appropriate long-term holdings, everyone involved with actually offering the products says so, and there are literally the financial industries equivalent of ambulance chasers going after financial professionals who do suggest them as long-term holdings.
You're stretching the original quote. FINRA did not say they are never appropriate long-term holdings, they said they are typically not. That implies they sometimes are. They go on to name two cases where they can be (hedging strategies and sophisticated trading strategies). They also never discuss individual investors here, this is about financial firms selling and recommending them, and the responsibility in selling or recommending something is much higher than the responsibility in using my own money on something or discussing it in a forum.

They link to their notice to individual buy-and-hold investors. Why did you choose the notice to financial firms instead of that one?
https://www.finra.org/investors/alerts/ ... -investors
What happens if I hold longer than one trading day? While there may be trading and hedging strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.
I carefully considered, and I determined that it was appropriate for my portfolio.

FINRA, the SEC, and the financial firms offering the products do not say they are never appropriate for long-term holdings, let alone that they are "irresponsible", your earlier position. And there are no cases of financial professionals getting in trouble for recommending anything remotely similar to Mr. Hedgefundie's strategy to people with a high risk-tolerance. It's almost always at least two of the following: a high percentage in a specific sector for people with a low or moderate risk-tolerance. Not an amount that "would not materially change the course of my retirement savings" if lost, mixed between the S&P 500 and treasuries, and for people who are okay with a "risky investment".

rascott
Posts: 682
Joined: Wed Apr 15, 2015 10:53 am

Re: Leveraged ETF messages

Post by rascott » Sun Sep 08, 2019 1:43 pm

assetalloc wrote:
Sun Sep 08, 2019 12:03 pm
willthrill81 wrote:
Sun Sep 08, 2019 9:24 am
pepys wrote:
Sat Sep 07, 2019 9:26 pm
Tyler Aspect wrote:
Sat Sep 07, 2019 8:38 pm
Speculative investments such as 3X leveraged ETFs are not suitable for responsible long term investments
Not "responsible"? I earned my money and I am not putting myself at any risk by putting a small amount into a couple of leveraged etfs. How is that irresponsible?

Is 100% equities irresponsible? What about 100% equities, 1% bonds (using leverage)? Or investing when you have a mortgage or other debt?

If someone put all of their money into UPRO, I would agree with you, they're putting themselves at a high risk of going down ~90% and may need to depend on other people to help them because of this bad investment. But putting ~5-10% into a leveraged investment with stocks and bonds (like NTSX, PSLDX, one of the Hedgefundie portfolios) when you save a good amount is not irresponsible for long term investing, it's a part of a balanced portfolio.
A large swath of the posters here are in favor of retaining a mortgage in order to bolster their investments. That could be a riskier form of leverage than a leveraged ETF. Yet for some reason, this form of leverage does not conflict the Boglehead investment philosophy, though I don't really understand why. The consequences are not always the same, but leverage is leverage and nearly always increases an investor's risk.

Who is at greater risk, an investor with a mortgage and equivalent sized portfolio invested 100% in stocks or an investor with no debt at all who has 10% of their portfolio in leveraged ETFs? Why should one 'fit' within the Boglehead philosophy but not the other?
No, they are not talking of 90% cash & 10% leveraged etf, they are talking about ALL leveraged ETFs and dreaming of making $1M in 13 years. Then it won't be 10% of portfolios.

You have to have shelter for you and your family. So you have to either rent or buy. In either case you are keeping your cash dry to invest by borrowing money on your home. Some people prefer to rent in current lofty home markets. The idea of borrowing from mortgage and investing in bogle portfolio is about a managed risk investment, where you have insurance if your house burns down. For leveraged ETFs you have be prepared for 99% value loss, as they have done in 2000 & 2008 (twice in 10 years).

Both 90%+ down drafts have been "studied on paper" by these young investors who have only seen 10 years of very strong bull markets in stocks and bonds. They haven't dealt with other psychological issues that arise when markets fall so rapidly, especially when their $100K initial investment would have ballooned to $1M.
More dishonest posting. Nobody has advocated a position like you have described, not once.

aristotelian
Posts: 6028
Joined: Wed Jan 11, 2017 8:05 pm

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by aristotelian » Sun Sep 08, 2019 2:01 pm

Plenty of Bogleheads are 100% stock. I see no inherent conflict with the philosophy for anyone who wants to go to 200%. None of the proponents are claiming it is a "free lunch". Just be clear about the risks and do it using index funds, as cheaply and as diversified as possible.

rascott
Posts: 682
Joined: Wed Apr 15, 2015 10:53 am

Re: [Leveraged ETFs vs. Bogleheads Investment Philosophy]

Post by rascott » Sun Sep 08, 2019 2:08 pm

HEDGEFUNDIE wrote:
Sun Sep 08, 2019 1:14 pm
All this talk about how bad leverage is is making me antsy.

I’ve been back and forth about what to rebalance my EDV gains into. Now I’m confident PSLDX is the right place for that money.

I've been buying both PSLDX and PSPTX in my Roth accounts.

Post Reply