Why would any investor ever even consider a leveraged fund?

[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.

[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]

Lots of people like to gamble.

[Bluce]

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.

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.

[MoneyMarathon]

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.

[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]

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

viewtopic.php?f=10&t=272007

[technovelist]

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?

[kevinf]

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.

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.

[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.....

Yes, what could go wrong with such an understandable investment?

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.

[Beliavsky]

I 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]

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.

[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.)

[Call_Me_Op]

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.

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.

[Bluce]

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.

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.

[Valuethinker]

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.

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.

[birdog]

I would say an investor wouldn’t consider a leveraged fund. Only a speculator or a trader would.

[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.



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