Why would any investor ever even consider a leveraged fund?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
tvubpwcisla
Posts: 526
Joined: Sat Nov 09, 2019 10:09 am

Why would any investor ever even consider a leveraged fund?

Post by tvubpwcisla »

I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
Stay invested my friends.
Jim180
Posts: 433
Joined: Wed Jun 26, 2013 9:47 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by Jim180 »

Leveraged funds are for day traders who have a little "play" money they want to gamble with. An investor might be able to make a quick profit if they study technical analysis closely or if they buy such a fund just prior to the release of key economic data that could move the market. Long term it's a losing strategy because if you hold them more than a day they no longer move 2X or 3X the tracked index.
technovelist
Posts: 3297
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: Why would any investor ever even consider a leveraged fund?

Post by technovelist »

Lots of people like to gamble.
In theory, theory and practice are identical. In practice, they often differ.
User avatar
Bluce
Posts: 1016
Joined: Tue May 10, 2011 11:01 pm
Location: Finger Lakes, NYS

Re: Why would any investor ever even consider a leveraged fund?

Post by Bluce »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
I bought a highly-leveraged closed-end bond fund last summer; ticker is PCI. At its high point it was right around 7% of my PF; it is now about 5.5%.

It was/is just an experiment. I had been reading up on CEFs and wanted to test the waters so I did, knowing that it could be very volatile. It is down YTD about 32% as of Friday.

The yield was over 8%, I will find out what it is now in a few days when it pays. No matter where it goes, it isn't going to change my life any. Just another experiment with a small % of my PF.
"There are no new ideas, only forgotten ones." -- Amity Shlaes
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

Re: Why would any investor ever even consider a leveraged fund?

Post by MoneyMarathon »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.
It sounds like you answered your own question. Here's a visual, for someone buying SSO in November 2008.

Image
User avatar
birdog
Posts: 933
Joined: Fri Apr 07, 2017 1:35 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by birdog »

I learned my lesson with a triple weighted inverse natural gas ETF five years ago. Never again. It seemed like such a good idea at the time.....
potatopancake
Posts: 38
Joined: Fri Jul 13, 2018 4:38 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by potatopancake »

There are over 150 pages of discussion this topic based on HEDGEFUNDIE's UPRO/TMF investment.

viewtopic.php?f=10&t=272007
technovelist
Posts: 3297
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: Why would any investor ever even consider a leveraged fund?

Post by technovelist »

birdog wrote: Sat Mar 28, 2020 9:58 pm I learned my lesson with a triple weighted inverse natural gas ETF five years ago. Never again. It seemed like such a good idea at the time.....
Yes, what could go wrong with such an understandable investment? :confused
In theory, theory and practice are identical. In practice, they often differ.
kevinf
Posts: 243
Joined: Mon Aug 05, 2019 11:35 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by kevinf »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
I moved from VTSAX to PSLDX in my roth recently and I hold NTSX in taxable. These are both "hands-off" leveraged funds, rather than the "rebalance daily" variety. I want to retire early and am willing to take some extra risk to make that happen. If my brokerage investments fail, I would fall back to social security and working longer.

Back-testing of these funds is promising, and they've performed as expected during the "March Madness" virus edition.
User avatar
birdog
Posts: 933
Joined: Fri Apr 07, 2017 1:35 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by birdog »

technovelist wrote: Sat Mar 28, 2020 11:11 pm
birdog wrote: Sat Mar 28, 2020 9:58 pm I learned my lesson with a triple weighted inverse natural gas ETF five years ago. Never again. It seemed like such a good idea at the time.....
Yes, what could go wrong with such an understandable investment? :confused
Actually, I did have a decent amount of understanding and was trading commodities both in the form of ETFs and futures successfully for some time. That’s what gave me the confidence to push in too many chips, so to speak. Anyway, that hard lesson is what started my conversion to being a Boglehead and I’m grateful for all the great advice that you and others give here. :sharebeer
Beliavsky
Posts: 984
Joined: Sun Jun 29, 2014 10:21 am

Re: Why would any investor ever even consider a leveraged fund?

Post by Beliavsky »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pmI have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.
Since few people have stock-picking ability, if you want higher returns than the S&P 500, and are willing to accept more risk, leveraging the S&P 500 can make sense. I don't think many people should be holding a portfolio with a 1.5 beta to the S&P.
DLR62
Posts: 8
Joined: Sun Mar 15, 2020 8:18 am

Re: Why would any investor ever even consider a leveraged fund?

Post by DLR62 »

As already stated for gambling purposes only. By design they are subject to options time decay. They are all headed for fund liquidation in the long-term. It can't end any other way. I talked a young lady out of buying one last WED-THU on a DGI investing forum. She was just sure the market could not hold that epic run in this environment. I happened to agree with her assessment, but convinced her if she felt the need to hedge, she should just buy a long dated SPY put. If I am going to gamble with some fun money I'd rather give my crystal ball 6 months to be right instead of a week or two.
User avatar
nisiprius
Advisory Board
Posts: 42606
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: Why would any investor ever even consider a leveraged fund?

Post by nisiprius »

1) Because as a gambling move it "has the potential" to double or triple your money in a short time.

2) As a gambling maneuver, the house percentage, expressed as an expense ratio, is much lower than lottery tickets, and probably much lower than casino gambling if expressed as a rate per unit of time (X% per year versus Y% per pull of the handle).

3) Because it doesn't require you to open a special margin account, and does limit your risk to the total amount of money you invested.

4) Because they don't understand how the funds actually work, and haven't read or haven't understood the fairly clear warnings on the ETF provider's basic web page describing the product. It is almost as if a certain number of them are investing simply based on the name of the ETF.

(In addition, and in a completely different category, there are people in the forum who have a sophisticated understanding of these product, have said that they have a high risk tolerance and plenty of money, who have described strategies involve systematic rebalancing and the use of several different leveraged ETFs working together. I happen to have a negative view of these undertakings, but the people engaging in them are neither naïve nor uninformed.)
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.
Call_Me_Op
Posts: 8094
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Why would any investor ever even consider a leveraged fund?

Post by Call_Me_Op »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
Did you get a mortgage when you bought your house? If so, you used significant leverage to buy an asset the can go down in value.

I am not justifying leverage, just making you aware that you probably already have used it.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
User avatar
Bluce
Posts: 1016
Joined: Tue May 10, 2011 11:01 pm
Location: Finger Lakes, NYS

Re: Why would any investor ever even consider a leveraged fund?

Post by Bluce »

Call_Me_Op wrote: Sun Mar 29, 2020 10:15 am
tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
Did you get a mortgage when you bought your house? If so, you used significant leverage to buy an asset the can go down in value.

I am not justifying leverage, just making you aware that you probably already have used it.
Excellent point. And to expand: If you borrow money to buy a vehicle, you KNOW FOR SURE that it will decrease in value -- unlike a house, which may or may not.

Although I don't know anyone personally in this position, there are people out there who owe more on their car than it's worth. How silly.

When I was young, as I recall, car loans only went out 36 months. Now they are out 72 or maybe 84 months? Just because lenders are willing to offer them doesn't mean people have to take them -- but they do. They have no one to blame but themselves.
"There are no new ideas, only forgotten ones." -- Amity Shlaes
Valuethinker
Posts: 41791
Joined: Fri May 11, 2007 11:07 am

Re: Why would any investor ever even consider a leveraged fund?

Post by Valuethinker »

tvubpwcisla wrote: Sat Mar 28, 2020 8:49 pm I have heard some talk about investors getting into leveraged funds to ride the wave back up in a big way.

This seems crazy to me and definitely not in my investment plan.

:shock:
My first stock investment (ad opposed to mutual funds) ever was warrants (effectively a long dated call option) on stock of a brick making company during a recession.

I think I finally sold them for about 1 cent having lost 97% of my money.

Leveraged investments hurt. Maybe you have to experience that loss to understand how much they hurt.
User avatar
birdog
Posts: 933
Joined: Fri Apr 07, 2017 1:35 pm

Re: Why would any investor ever even consider a leveraged fund?

Post by birdog »

I would say an investor wouldn’t consider a leveraged fund. Only a speculator or a trader would.
EfficientInvestor
Posts: 384
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: Why would any investor ever even consider a leveraged fund?

Post by EfficientInvestor »

While leveraged ETFs and mutual funds are not optimal forms of leverage (futures and options are better), they are still a tool that can be utilized to implement risk parity strategies that provide a better balance of risk among stocks and bonds. This improved balance has historically resulted in better returns (both total and risk-adjusted) and in my opinion, will continue to do so. Leveraged funds can definitely get you in trouble if not used as part of a sound investment strategy. However, if you know how to use them appropriately, they can be a phenomenal tool. Here is a 15+ year backtest of a 30/70 split of 2X stock and 7-10 yr treasury bond funds vs 100% stock and the Vanguard Balanced (60/40) fund. The same level of overperformance may not continue due to lower interest rates. However, this is enough proof to show that leveraged funds are a legitimate tool. FWIW, this portfolio is up 0.59% for the year.

Image

Source - https://www.portfoliovisualizer.com/bac ... ion3_2=100
Post Reply