Triple levered index funds

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Andymoler58
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Triple levered index funds

Post by Andymoler58 » Fri Nov 29, 2019 10:41 pm

I have this theory in the next recession that I will average into triple levered S&P index funds as the indexes drop and make out pretty well as long as I have the stomach to hold on.

I’ve done a little bit of this with the LBJ Latin American triple indexed fund and have come out ok, sometimes it takes a while to get it come back but it eventually does.

Does anyone else have any experience with triple levered funds?

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mrspock
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Re: Triple levered index funds

Post by mrspock » Fri Nov 29, 2019 10:43 pm

Andymoler58 wrote:
Fri Nov 29, 2019 10:41 pm
I have this theory in the next recession that I will average into triple levered S&P index funds as the indexes drop and make out pretty well as long as I have the stomach to hold on.

I’ve done a little bit of this with the LBJ Latin American triple indexed fund and have come out ok, sometimes it takes a while to get it come back but it eventually does.

Does anyone else have any experience with triple levered funds?
Pssst.... HedgeFundie's adventure threads.

viewtopic.php?f=10&t=272007

am
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Re: Triple levered index funds

Post by am » Sat Nov 30, 2019 2:36 pm

MotoTrojan wrote:
Sat Nov 30, 2019 2:19 pm
am wrote:
Sat Nov 30, 2019 2:14 pm
MotoTrojan wrote:
Sat Nov 30, 2019 2:10 pm
HEDGEFUNDIE wrote:
Sat Nov 30, 2019 12:34 pm
am wrote:
Sat Nov 30, 2019 12:25 pm


I am going to join your adventure with 10-20k. The comments on the wiki make me hesitate. Is the volatility decay taken into consideration with your strategy?
I describe the volatility bonus in full in the original post in my original thread.
UPRO has moments of bonus but TMF has significantly underperformed a naive 3x long-bond return since inception, even as rates have dropped. I don’t see any bonus on the bond side.
Is that why you use edv? How does that back test instead of tmf? Would you use 55 upro and 45 edv to get similar results?
Yes. EDV has less duration though so it won’t spike like TMF does and potentially save the day. Thus I went with 43/57 UPRO/EDV which is a similar ratio of volatility historically, but less overall leverage of course. 55/45 UPRO/EDV would be a little too much of an equity tilt for my blood.
I backtested on portfolio visualizer and from 09-present upro 55/tmf 45 returned 2x or so 43 upro/edv with similar max drawdown. How does your choice do before that?

MotoTrojan
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Re: Triple levered index funds

Post by MotoTrojan » Sat Nov 30, 2019 3:06 pm

am wrote:
Sat Nov 30, 2019 2:36 pm
MotoTrojan wrote:
Sat Nov 30, 2019 2:19 pm
am wrote:
Sat Nov 30, 2019 2:14 pm
MotoTrojan wrote:
Sat Nov 30, 2019 2:10 pm
HEDGEFUNDIE wrote:
Sat Nov 30, 2019 12:34 pm


I describe the volatility bonus in full in the original post in my original thread.
UPRO has moments of bonus but TMF has significantly underperformed a naive 3x long-bond return since inception, even as rates have dropped. I don’t see any bonus on the bond side.
Is that why you use edv? How does that back test instead of tmf? Would you use 55 upro and 45 edv to get similar results?
Yes. EDV has less duration though so it won’t spike like TMF does and potentially save the day. Thus I went with 43/57 UPRO/EDV which is a similar ratio of volatility historically, but less overall leverage of course. 55/45 UPRO/EDV would be a little too much of an equity tilt for my blood.
I backtested on portfolio visualizer and from 09-present upro 55/tmf 45 returned 2x or so 43 upro/edv with similar max drawdown. How does your choice do before that?
From 1982-2018 it was roughly 17% vs. 20% CAGR. From 1955-2018 I believe it was about 11.5% (can’t recall exactly) vs. 13%.

Their drawdowns in 2007-2009 were not similar.

AZAttorney11
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Re: Triple levered index funds

Post by AZAttorney11 » Sun Dec 01, 2019 10:45 am

HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?

HEDGEFUNDIE
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Re: Triple levered index funds

Post by HEDGEFUNDIE » Sun Dec 01, 2019 10:53 am

AZAttorney11 wrote:
Sun Dec 01, 2019 10:45 am
HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?
Because 55/45 has delivered identical returns to 100% UPRO at half the risk

https://www.portfoliovisualizer.com/bac ... tion2_2=45

...and this is during a period without any crashes. Throw in a Great Recession or two over the next 20 years, and it becomes clear that 100% UPRO is just plain reckless.

AZAttorney11
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Re: Triple levered index funds

Post by AZAttorney11 » Sun Dec 01, 2019 11:07 am

HEDGEFUNDIE wrote:
Sun Dec 01, 2019 10:53 am
AZAttorney11 wrote:
Sun Dec 01, 2019 10:45 am
HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?
Because 55/45 has delivered identical returns to 100% UPRO at half the risk

https://www.portfoliovisualizer.com/bac ... tion2_2=45

...and this is during a period without any crashes. Throw in a Great Recession or two over the next 20 years, and it becomes clear that 100% UPRO is just plain reckless.
That's very helpful, thank you. That said, I'm not sure if I articulated my question accurately, or if I am misunderstanding some or all of your response. I'm not talking about 100% UPRO in isolation. I'm talking about taking a small percentage of one's portfolio, say 5%, and investing it in UPRO. Does that change your answer? I'm guessing you'll tell me to take that 5% of the portfolio and allocate it 55/45 UPRO and TMF!!!

krb
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Re: Triple levered index funds

Post by krb » Sun Dec 01, 2019 1:23 pm

AZAttorney11 wrote:
Sun Dec 01, 2019 10:45 am
HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?
Same question. I never knew about these. Now I'm looking into them. I get that you're not holding concentrated (3X) equities but it's financial instruments. But I'm thinking of putting maybe a few thousand dollars in - not much - to see what happens. Why would you not put a little in?

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LadyGeek
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Re: Triple levered index funds

Post by LadyGeek » Sun Dec 01, 2019 5:07 pm

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

I moved a separate discussion of the wiki article into a new thread. See: [Wiki article update - Inverse and leveraged ETFs]

Challenges and suggested updates to Inverse and leveraged ETFs should be discussed in that thread.

Let's use this thread to answer the OP's question.
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.

Hydromod
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Re: Triple levered index funds

Post by Hydromod » Sun Dec 01, 2019 7:43 pm

krb wrote:
Sun Dec 01, 2019 1:23 pm
Same question. I never knew about these. Now I'm looking into them. I get that you're not holding concentrated (3X) equities but it's financial instruments. But I'm thinking of putting maybe a few thousand dollars in - not much - to see what happens. Why would you not put a little in?
A while back I read advice that one could "juice" overall portfolio returns by adding a little (no more than 25%) 3x equities, I wish I could remember where this was proposed. The advice was to maintain the asset allocation fixed with rebalancing, so that during good times one is continually spinning off returns to the rest of the portfolio (or only contributing to the other funds in the portfolio) and in bad times only a small part of the portfolio is devastated. This is not risk parity in the way Hedgefundie proposed, but the UPRO is buffered anyway.

A temptation would be to let the allocation creep higher, then a crash can hit the portfolio harder than otherwise.

Uncorrelated
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Re: Triple levered index funds

Post by Uncorrelated » Mon Dec 02, 2019 4:31 am

HEDGEFUNDIE wrote:
Sun Dec 01, 2019 10:53 am
AZAttorney11 wrote:
Sun Dec 01, 2019 10:45 am
HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?
Because 55/45 has delivered identical returns to 100% UPRO at half the risk

https://www.portfoliovisualizer.com/bac ... tion2_2=45

...and this is during a period without any crashes. Throw in a Great Recession or two over the next 20 years, and it becomes clear that 100% UPRO is just plain reckless.
I'm getting slightly annoyed with the usage of portfolio visualizer to push strategies that contain long bonds. On the time period from 1934 to 1985, a portfolio of 35% UPRO and 65% S&P (=170% S&P) outperforms 55/45 UPRO/TMF with less risk. Assuming one borrows at the t-bill rate and volatility decay does not exists (simulated with simba's spreadsheet). On the time period from 1934 to 2019, 55/45 does indeed outperform outperform 170% S&P with similar volatility, the outperformance disappears once we remove a single year (2008) from the backtest history.

Both portfolio's get murdered in the 1931 crash (90% drawdown for both). In the time period from 1871 to 1930, 170% levered S&P 500 significantly outperforms 55/45 with lower volatility.

We have absolutely zero statistical confidence that 55/45 outperforms a simple S&P 500 portfolio that is leveraged to the same volatility.


Edit: to be clear, I disagree that 100% UPRO is plan reckless. I especially disagree with the argument that UPRO is reckless because 55/45 delivers identical returns, that is only true on the cherry pickled dataset available on PV.

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Stef
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Re: Triple levered index funds

Post by Stef » Mon Dec 02, 2019 5:13 am

HEDGEFUNDIE wrote:
Sun Dec 01, 2019 10:53 am
Because 55/45 has delivered identical returns to 100% UPRO at half the risk

https://www.portfoliovisualizer.com/bac ... tion2_2=45

...and this is during a period without any crashes. Throw in a Great Recession or two over the next 20 years, and it becomes clear that 100% UPRO is just plain reckless.
Several backtests prooved that something like 50% SPY 50% SSO substantially outperformed 100% SPY. No need for bonds if we are looking at 25-30 years or even longer time horizons.

I still don't believe that UPRO/TMF will work like in the past.

Uncorrelated
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Re: Triple levered index funds

Post by Uncorrelated » Mon Dec 02, 2019 5:44 am

Hydromod wrote:
Sun Dec 01, 2019 7:43 pm
krb wrote:
Sun Dec 01, 2019 1:23 pm
Same question. I never knew about these. Now I'm looking into them. I get that you're not holding concentrated (3X) equities but it's financial instruments. But I'm thinking of putting maybe a few thousand dollars in - not much - to see what happens. Why would you not put a little in?
A while back I read advice that one could "juice" overall portfolio returns by adding a little (no more than 25%) 3x equities, I wish I could remember where this was proposed. The advice was to maintain the asset allocation fixed with rebalancing, so that during good times one is continually spinning off returns to the rest of the portfolio (or only contributing to the other funds in the portfolio) and in bad times only a small part of the portfolio is devastated. This is not risk parity in the way Hedgefundie proposed, but the UPRO is buffered anyway.

A temptation would be to let the allocation creep higher, then a crash can hit the portfolio harder than otherwise.
krb wrote:
Sun Dec 01, 2019 1:23 pm
AZAttorney11 wrote:
Sun Dec 01, 2019 10:45 am
HEDGEFUNDIE (and others), what's wrong with a small allocation to UPRO (3x S&P 500) for a long-term buy and hold investor? I keep reading about volatility decay and drag, but a 10 year chart of UPRO utterly annihilates the S&P 500 by a factor of substantially greater than 3x. This forum is full of messages about UPRO and other leveraged products being for speculators and traders, but not buy and holders. Why is that? It seems to me like the market timer threads of the world could have been avoided by using UPRO as a long-term holding as part of a broadly diversified portfolio. Even a small allocation, say 5-10%, has the potential to deliver substantial returns over the next several decades.

Yes, yes, yes... we will have a bear market eventually and the downside is going to be horrific. But for an investor with a long time horizon, high risk tolerance, and ability to continue adding new money to the market, UPRO seems like it could play a small role in a buy and hold portfolio.

What am I missing?
Same question. I never knew about these. Now I'm looking into them. I get that you're not holding concentrated (3X) equities but it's financial instruments. But I'm thinking of putting maybe a few thousand dollars in - not much - to see what happens. Why would you not put a little in?



These questions are similar so I'll answer them them both at once.

Suppose that you have a portfolio of 70% stocks and 30% bonds (total bond market). Because you want to test UPRO you change your portfolio to 60% stocks, 10% UPRO and 30% bonds. No harm in that, right? But there is something seriously wrong with this portfolio: UPRO is essentially 30% stocks and -20% bonds. Your effective portfolio is 90% stocks, -20% bonds and 30% bonds. You're paying borrowing fees for nothing. A simple portfolio of 90% stocks and 10% bonds is more effective.

Above I mentioned that a mix of UPRO (3x) and S&P 500 to attain 170% leverage. That is also a bad idea, It would be better to mix SSO (2x) and S&P 500. It would be even better to buy options to get 170% leverage, that way you don't pay for leverage that you don't need.

Leveraged ETF's are only useful if you actually want more than 100% equity exposure or when you want to combine high equity exposure with long bond exposure. It makes no sense to purchase UPRO if your final portfolio leverage can be obtained using other means.

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Stef
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Re: Triple levered index funds

Post by Stef » Mon Dec 02, 2019 5:52 am

Uncorrelated wrote:
Mon Dec 02, 2019 5:44 am
Above I mentioned that a mix of UPRO (3x) and S&P 500 to attain 170% leverage. That is also a bad idea, It would be better to mix SSO (2x) and S&P 500. It would be even better to buy options to get 170% leverage, that way you don't pay for leverage that you don't need.

Leveraged ETF's are only useful if you actually want more than 100% equity exposure or when you want to combine high equity exposure with long bond exposure. It makes no sense to purchase UPRO if your final portfolio leverage can be obtained using other means.
How about simplicity? Achieving 150% leverage with 75% VTI/VT and 25% UPRO seems like a very straightforward idea?

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