Are 3x leveraged ETFs the long-term winning strategy?

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tradri
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Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

I haven't seen much discussion online about the historical long-term performance of leveraged ETFs and if they will continue to deliver satisfactory results in the future.

I think this topic is incredibly interesting, because even Jack Bogle admitted that leveraging the stock market is (in theory) the winning strategy long-term: https://youtu.be/k6ra5POdsYg?t=10m20s

Perhaps the disadvantage he mentioned in the video of having somebody to "bail you out of the bottom" isn't necessary, if you reset your leverage daily and keep a constant leverage ratio. (as leveraged ETFs do) This also has its downsides, as you get to experience volatility decay, but maybe the absolute returns in the long-run are still worth it, if it means that you won't get margin called.

The only way to really find out is to look into the past, and for that I have found the articles from ddnum very insightful. In the first article (http://www.ddnum.com/articles/leveragedETFs.php) they concluded that 2x leverage is the optimal leverage an ETF-investor should take long-term. However, they only use the price index in that article. In a follow-up article (http://www.ddnum.com/articles/leveragedETFsandDCA.php) they use the more appropriate total return index. In that article, one could get all the way up to 5x (in theory) without sacrificing long-term returns.

All of this data makes me personally really excited about holding a 3x leveraged ETF on a broad index like the S&P 500 for the long-run, but I would love to hear your insights on that topic.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Ocean77 »

Imagine you invest your long term retirement savings into this thing, and have nerves of steel to live with the volatility and all. And then once during your multi-decade investment life, just once, there is a nasty crash and the stocks go down by 35% on one day. Then bounce right up the next day. Your entire investment would be lost. This may never happen of course, but do you want to bet on it?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Jags4186 »

Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.

Image
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

Ocean77 wrote: Wed Mar 24, 2021 2:33 pm Imagine you invest your long term retirement savings into this thing, and have nerves of steel to live with the volatility and all. And then once during your multi-decade investment life, just once, there is a nasty crash and the stocks go down by 35% on one day. Then bounce right up the next day. Your entire investment would be lost. This may never happen of course, but do you want to bet on it?
I totally agree. If there is the possibility of the investment going to 0 then it doesn't matter how great the returns are, if all the returns can be lost in a single moment. That's why I think leveraging using a margin account is way too dangerous. (for me)

However, I think the risk of 3x leveraged ETFs going to 0 is slim to none, as the maximum drawdown the S&P 500 has ever experience is about -20% (black monday) and on top of that there are circuit breakers that would halt trading for the day if the S&P 500 crashes by more than 20% in a day.

I can't think of a scenario where the stock market can crash by -34% in a single day.

P.S. This might differ from product to product, but the 3x ETP I'm interested in (from WisdomTree) has a "crash-protection" built into, which ensures that the ETP would reset its leverage already at -16.66% and not at the end of the trading day. But, this kind of drawdown has only happened once (black monday) so I'm not really concerned with that.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

Read this OP in detail. Holding just a 3x equity ETF makes no sense, it looks great since inception but a real prolonged drawdown will dig a hole that can't be fixed.

From 1955-today it is about tied with the raw S&P500, but it had several 97%+ drawdowns, no thanks.

viewtopic.php?t=272007
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 2:43 pm

P.S. This might differ from product to product, but the 3x ETP I'm interested in (from WisdomTree)
Be careful. I don't know much about ETPs but ETNs are much more dangerous than ETFs as you don't own the underlying financial assets, it is a pure derivative. ETP sounds similar.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.

Image
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 2:46 pm Read this OP in detail. Holding just a 3x equity ETF makes no sense, it looks great since inception but a real prolonged drawdown will dig a hole that can't be fixed.

From 1955-today it is about tied with the raw S&P500, but it had several 97%+ drawdowns, no thanks.

viewtopic.php?t=272007
I read through Hedgefundie's post and most of the posts he linked (didn't have time to read through the thousands of replies though), but from what I can tell he only said that going 100% UPRO would lead to "super deep drawdowns", which is true. But the same can be said for a stock/bond portfolio vs a 100% stock portfolio as well, right?

I know that "risk parity" can definitely produce better risk-adjusted returns, but I am for now interested in a strategy that can achieve the highest absolute returns long-term.

Also, where did you get the -97% drawdown from?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by hi_there »

There are some studies that people have published online with leveraged ETFs. There is pretty convincing evidence that you can use leverage to outperform normal stocks over a long period of time, albeit with less risk efficiency (2x leverage will give you less than 2x annualized returns but 2x daily volatility). Most of the successful studies use some kind of rebalancing portfolio and have leverage somewhere between 1.5x and 2.0x; higher leverage is counterproductive due to severe drawdowns. 3x is definitely too high.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by fingoals »

While pure 3x leveraged ETFs-based strategy is definitely quite risky (though I agree with people saying that total money loss due to S&P 500's drop of 34% in a day is extremely unlikely), an SMA200-based rotational 3x leveraged strategy (viewtopic.php?f=10&t=297591) is not and seems like a great approach.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Tamarind »

tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 2:48 pm
tradri wrote: Wed Mar 24, 2021 2:43 pm

P.S. This might differ from product to product, but the 3x ETP I'm interested in (from WisdomTree)
Be careful. I don't know much about ETPs but ETNs are much more dangerous than ETFs as you don't own the underlying financial assets, it is a pure derivative. ETP sounds similar.
I was also very skeptical at first, but after digging deeper into the WisdomTree ETPs I can say that they are pretty much the same as regular swap ETFs.

The only reason why they are called "ETP" and not "ETF" is because under European law a "fund" can't exceed a leverage of 2x. But the WisdomTree ETPs are fully collateralized, so in the event of default, a trustee actually holds securities that will be paid out to me. https://www.wisdomtree.eu/de-at/-/media ... ucture.jpg

If you're interested (and live in Europe), here is a PDF detailing the differences between WisdomTree ETPs, ETFs and other securities: https://www.shortandleverageetp.co.uk/U ... d-know.pdf
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 2:57 pm
MotoTrojan wrote: Wed Mar 24, 2021 2:46 pm Read this OP in detail. Holding just a 3x equity ETF makes no sense, it looks great since inception but a real prolonged drawdown will dig a hole that can't be fixed.

From 1955-today it is about tied with the raw S&P500, but it had several 97%+ drawdowns, no thanks.

viewtopic.php?t=272007
I read through Hedgefundie's post and most of the posts he linked (didn't have time to read through the thousands of replies though), but from what I can tell he only said that going 100% UPRO would lead to "super deep drawdowns", which is true. But the same can be said for a stock/bond portfolio vs a 100% stock portfolio as well, right?

I know that "risk parity" can definitely produce better risk-adjusted returns, but I am for now interested in a strategy that can achieve the highest absolute returns long-term.

Also, where did you get the -97% drawdown from?
Hedgefundie data. The Portofolio Visualizer plot there is SSO, a 2x fund. Simulated UPRO had a 97% monthly drawdown in the GFC, I would assume it was close to 99% intra-month.

As I said, it took from 1955 to ~2019 for simulated UPRO to catch up with a 100% S&P500 investment. If that sounds appealing to you, then go for it. I think it is one of the worst investment ideas imaginable. If you want to take on extra volatility and drawdown and have an expectation to beat the market then go all-in on deep-value and deep-momentum (25/25/25/25 QVAL/IVAL/QMOM/IMOM would be my suggestion) and add some leverage to that.
Last edited by MotoTrojan on Wed Mar 24, 2021 3:09 pm, edited 3 times in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Makefile »

Tamarind wrote: Wed Mar 24, 2021 3:01 pm Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
Yeah. The UPRO prospectus says:
The return of the Fund for periods longer than a single
day will be the result of its return for each day compounded
over the period. The Fund’s returns for periods longer than a
single day will very likely differ in amount, and possibly
even direction, from the Fund’s stated multiple (3x) times
the return of the Index for the same period. For periods lon-
ger than a single day, the Fund will lose money if the Index’s
performance is flat, and it is possible that the Fund will lose
money even if the level of the Index rises.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by fingoals »

Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (especially using a rotational leveraged strategy - please see my comment above). Am I missing something?
Last edited by fingoals on Wed Mar 24, 2021 3:10 pm, edited 1 time in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Makefile »

This is a bit far-fetched I admit, but what happens to leveraged and inverse ETFs if the market is closed for an extended period, as it was for four months during World War I? Or is the financial system so much more complex now that even vanilla funds/ETFs would lose more than their underlying holdings, too?

Closest recent example is 9/12/01-9/16/01. If the market is unexpectedly closed, is that like it staying "flat" re: the above warning in the prospectus?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

hi_there wrote: Wed Mar 24, 2021 2:57 pm There are some studies that people have published online with leveraged ETFs. There is pretty convincing evidence that you can use leverage to outperform normal stocks over a long period of time, albeit with less risk efficiency (2x leverage will give you less than 2x annualized returns but 2x daily volatility). Most of the successful studies use some kind of rebalancing portfolio and have leverage somewhere between 1.5x and 2.0x; higher leverage is counterproductive due to severe drawdowns. 3x is definitely too high.
Yes, due to volatility decay a leveraged ETF will definitely perform worse on a risk-adjusted basis, however the same can be said for short-term bonds vs stocks as well, since they also have a higher Sharpe ratio than stocks. I am looking for a long-term investment that is going to deliver the best absolute returns, and I don't care that much about risk-adjusted return.

Risk parity definitely works, but I am interested if a 100% equity leveraged investment would also work, similar to how some people only invest in the S&P 500 and don't hold bonds.

Can you please link some research that 3x is definitely too high?
Last edited by tradri on Wed Mar 24, 2021 3:11 pm, edited 1 time in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Makefile »

fingoals wrote: Wed Mar 24, 2021 3:08 pm "... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (especially using a rotational leveraged strategy - please see my comment above). Am I missing something?
Well the prospectus has the giant warning I posted above saying it doesn't necessarily track even the right direction if held more than one day. I assume the warning is an SEC requirement. Could someone shed light on when that "error" would and wouldn't happen?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by nisiprius »

I think you need to make a complete separation between two completely different things:

a) Investing in the stock market using 3X leverage (with an actual loan and a possibility of losing more money than you invested)
b) Investing in the stock market using daily-3X-leveraged ETFs.

They shouldn't be mentioned in the same breath, as the risk and return characteristics of the two are very different.

3X products are pretty new. None of them shows performance during the global financial crisis. We can look at an example of how a 2X leveraged product performed, though. According to the factsheet for ULPIX from ProFunds:
Fund performance and index history
The UltraBull ProFund seeks daily investment results, before fees and expenses, that are 2x the return of the S&P 500® (the "Index") for a single day, not for any other period.

Inception 12/26/1997

Periods greater than one year are annualized.

Investor Class NAV Total Return [since] inception, 6.99%
Service Class NAV Total Return [since] inception, 5.97%
S&P 500, 8.14%
Image

Get that? The fund provider's factsheet shows that the "2X" fund not only failed to double the S&P 500, it underperformed the S&P 500.

If you knew this already and have a clear understanding of why it happened, then, no problem.
Last edited by nisiprius on Wed Mar 24, 2021 3:31 pm, edited 1 time in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:10 pm
hi_there wrote: Wed Mar 24, 2021 2:57 pm There are some studies that people have published online with leveraged ETFs. There is pretty convincing evidence that you can use leverage to outperform normal stocks over a long period of time, albeit with less risk efficiency (2x leverage will give you less than 2x annualized returns but 2x daily volatility). Most of the successful studies use some kind of rebalancing portfolio and have leverage somewhere between 1.5x and 2.0x; higher leverage is counterproductive due to severe drawdowns. 3x is definitely too high.
Yes, due to volatility decay a leveraged ETF will definitely perform worse on a risk-adjusted basis, however the same can be said for short-term bonds vs stocks as well, since they also have a higher Sharpe ratio than stocks. I am looking for a long-term investment that is going to deliver the best absolute returns, and I don't care that much about risk-adjusted return.

Risk parity definitely works, but I am interested if a 100% equity leveraged investment would also work, similar to how some people only invest in the S&P 500 and don't hold bonds.

Can you please link some research that 3x is definitely too high?
Research Kelly Criterion.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

fingoals wrote: Wed Mar 24, 2021 2:59 pm While pure 3x leveraged ETFs-based strategy is definitely quite risky (though I agree with people saying that total money loss due to S&P 500's drop of 34% in a day is extremely unlikely), an SMA200-based rotational 3x leveraged strategy (viewtopic.php?f=10&t=297591) is not and seems like a great approach.
Well, this is kind of a market-timing strategy. I don't know if market-timing actually works. Here we are on the Bogleheads forum, and I think Jack Bogle was against market timing. lol
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by fingoals »

MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You're correct for pure 3x leveraged strategy case, but not for 3x rotational leveraged strategy (which I meant and have edited my comment to emphasize that). Please see my initial comment in this thread with a link to an excellent relevant discussion.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

nisiprius wrote: Wed Mar 24, 2021 3:11 pm I think you need to make a completely separation between two completely different things:

a) Investing in the stock market using 3X leverage (with an actual loan and a possibility of losing more money than you invested)
b) Investing in the stock market using daily-3X-leveraged ETFs.

They shouldn't be mentioned in the same breath, as the risk and return characteristics of the two are very different.

3X products are pretty new. None of them shows performance during the global financial crisis. We can look at an example of how a 2X leveraged product performed, though. According to the factsheet for ULPIX from ProFunds:
Fund performance and index history
The UltraBull ProFund seeks daily investment results, before fees and expenses, that are 2x the return of the S&P 500® (the "Index") for a single day, not for any other period.

Inception 12/26/1997

Periods greater than one year are annualized.

Investor Class NAV Total Return [since] inception, 6.99%
Service Class NAV Total Return [since] inception, 5.97%
S&P 500, 8.14%
Image

Get that? The fund provider's factsheet shows that the "2X" fund not only failed to double the S&P 500, it underperformed the S&P 500.

If you knew this already and have a clear understanding of why it happened, then, no problem.
The backtest is terrible indeed. Sure it got unlikely with timing of the 2000 crash, but even looking at average 3-7 year rolling returns the raw S&P500 smokes it.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

fingoals wrote: Wed Mar 24, 2021 3:15 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm

Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You're correct for pure 3x leveraged strategy case, but not for 3x rotational leveraged strategy (which I meant and have edited my comment to emphasize that). Please see my initial comment in this thread with a link to an excellent relevant discussion.
Yeah using something like this with market timing makes a bit more sense for sure, although trend following isn't something I am very bought into. Like I said to OP, if I wanted to just go all-in on risk I would do deep-value/deep-momentum and add a little leverage (20% realm, not 3x...).
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by abuss368 »

Back during our evil stock picking days before the Great Recession, we used a 3x leveraged inverse fund. So if markets declined your result was on steroids!

All I can say is be very careful. We learned the hard way and now simply invest in low cost total market index funds.

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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

As to the articles in the OP, they don't provide enough data on the backtest for me to be comfortable believing it. They mention 1% expense ratios, but say nothing about how the estimated the interest/swap payments on the leverage. If they missed those, it is a joke.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
Lifecycle investing is interesting, however they do account for the possibility of total loss (as far as I understood it) when you are using 2x direct leverage. Total loss is not possible with leveraged ETFs.

Leveraged ETFs surely provide a whole different risk/reward tradeoff with their volatility decay, but maybe it's worth pursuing if it means that you go with 3x leveraged ETFs and take on 3x the volatility for getting about 2x the returns long-term. (http://www.ddnum.com/articles/leveragedETFsandDCA.php)

Also, just because they have a warning doesn't mean one can't investigate how these products might have performed over very long periods of time.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:25 pm

Leveraged ETFs surely provide a whole different risk/reward tradeoff with their volatility decay, but maybe it's worth pursuing if it means that you go with 3x leveraged ETFs and take on 3x the volatility for getting about 2x the returns long-term. (http://www.ddnum.com/articles/leveragedETFsandDCA.php)

Also, just because they have a warning doesn't mean one can't investigate how these products might have performed over very long periods of time.
If you want to trust this backtest that is up to you, but I have not seen any convincing data to suggest you should expect 2x the returns long-term. The live fund example posted above looked closer to matching the market (slightly underperforming through most rolling periods) and the 1955-2019 UPRO simulated case I noted was tied over a very long timeframe that ended after a historic bull run.

If you want to endure 97% drawdowns for the possibility of matching the market, you do you. Beating the market by 1-2% over a lifetime can have huge payoffs, but this isn't the way to do it.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by nisiprius »

Makefile wrote: Wed Mar 24, 2021 3:11 pmWell the prospectus has the giant warning I posted above saying it doesn't necessarily track even the right direction if held more than one day. I assume the warning is an SEC requirement. Could someone shed light on when that "error" would and wouldn't happen?
It "would" have happened just within the last couple of years, Q1-Q3 of 2020. The warning isn't theoretical. Starting with $10,000,

⬆︎⬆︎⬆︎ S&P theoretical investment up $557.35; real-world index fund, VFIAX, up $554.59
⬇︎⬇︎⬇︎ UPRO "3X" investment, down $1.983.12.

Source

Image
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by fingoals »

MotoTrojan wrote: Wed Mar 24, 2021 3:18 pm
fingoals wrote: Wed Mar 24, 2021 3:15 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm

Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You're correct for pure 3x leveraged strategy case, but not for 3x rotational leveraged strategy (which I meant and have edited my comment to emphasize that). Please see my initial comment in this thread with a link to an excellent relevant discussion.
Yeah using something like this with market timing makes a bit more sense for sure, although trend following isn't something I am very bought into. Like I said to OP, if I wanted to just go all-in on risk I would do deep-value/deep-momentum and add a little leverage (20% realm, not 3x...).
I personally wouldn't call a rotational leveraged strategy going "all-in on risk"; perhaps, just riskier than an average BH strategy. Anyway ...

What do you mean by "deep-value/deep-momentum"? Could you clarify that and a relevant combination strategy with "a little leverage"?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 3:06 pm
tradri wrote: Wed Mar 24, 2021 2:57 pm
MotoTrojan wrote: Wed Mar 24, 2021 2:46 pm Read this OP in detail. Holding just a 3x equity ETF makes no sense, it looks great since inception but a real prolonged drawdown will dig a hole that can't be fixed.

From 1955-today it is about tied with the raw S&P500, but it had several 97%+ drawdowns, no thanks.

viewtopic.php?t=272007
I read through Hedgefundie's post and most of the posts he linked (didn't have time to read through the thousands of replies though), but from what I can tell he only said that going 100% UPRO would lead to "super deep drawdowns", which is true. But the same can be said for a stock/bond portfolio vs a 100% stock portfolio as well, right?

I know that "risk parity" can definitely produce better risk-adjusted returns, but I am for now interested in a strategy that can achieve the highest absolute returns long-term.

Also, where did you get the -97% drawdown from?
Hedgefundie data. The Portofolio Visualizer plot there is SSO, a 2x fund. Simulated UPRO had a 97% monthly drawdown in the GFC, I would assume it was close to 99% intra-month.

As I said, it took from 1955 to ~2019 for simulated UPRO to catch up with a 100% S&P500 investment. If that sounds appealing to you, then go for it. I think it is one of the worst investment ideas imaginable. If you want to take on extra volatility and drawdown and have an expectation to beat the market then go all-in on deep-value and deep-momentum (25/25/25/25 QVAL/IVAL/QMOM/IMOM would be my suggestion) and add some leverage to that.
Can you provide me with a link to the actual research Hedgefundie did?

Where do you get the data that shows that a 3x leveraged ETF would have underperformed from 1955 up until recently?

Multi-factor investing probably works, I have no doubt about that. I am just interested if leveraged ETFs work even better. (not taking into account the Sharpe ratio)
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

Makefile wrote: Wed Mar 24, 2021 3:06 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
Yeah. The UPRO prospectus says:
The return of the Fund for periods longer than a single
day will be the result of its return for each day compounded
over the period. The Fund’s returns for periods longer than a
single day will very likely differ in amount, and possibly
even direction, from the Fund’s stated multiple (3x) times
the return of the Index for the same period. For periods lon-
ger than a single day, the Fund will lose money if the Index’s
performance is flat, and it is possible that the Fund will lose
money even if the level of the Index rises.
Yes, of course the actual return will differ from the 3x. According to this article (http://www.ddnum.com/articles/leveragedETFsandDCA.php) a 3x ETF should produce around 2x the returns long-term.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Makefile »

nisiprius wrote: Wed Mar 24, 2021 3:28 pm
Makefile wrote: Wed Mar 24, 2021 3:11 pmWell the prospectus has the giant warning I posted above saying it doesn't necessarily track even the right direction if held more than one day. I assume the warning is an SEC requirement. Could someone shed light on when that "error" would and wouldn't happen?
It "would" have happened just within the last couple of years, Q1-Q3 of 2020. The warning isn't theoretical. Starting with $10,000,

⬆︎⬆︎⬆︎ S&P theoretical investment up $557.35; real-world index fund, VFIAX, up $554.59
⬇︎⬇︎⬇︎ UPRO "3X" investment, down $1.983.12.
That's what I thought, but I suppose the long HEDGEFUNDIE UPRO thread had legitimized UPRO somewhat in the back of my mind. So it sounds like long term holding of these leveraged ETFs is like seeing a red button tagged "do not press the red button" and going ahead to press it?
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

Makefile wrote: Wed Mar 24, 2021 3:09 pm This is a bit far-fetched I admit, but what happens to leveraged and inverse ETFs if the market is closed for an extended period, as it was for four months during World War I? Or is the financial system so much more complex now that even vanilla funds/ETFs would lose more than their underlying holdings, too?

Closest recent example is 9/12/01-9/16/01. If the market is unexpectedly closed, is that like it staying "flat" re: the above warning in the prospectus?
This is a black swan event indeed.

I would imagine that in that time period the ETF-provider wouldn't be able to enter new swap agreements, but the underlying assets the fund holds should still be there. So, in the worst case, I think it would be the same as if a swap provider goes bankrupt.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

fingoals wrote: Wed Mar 24, 2021 3:29 pm

What do you mean by "deep-value/deep-momentum"? Could you clarify that and a relevant combination strategy with "a little leverage"?
Momentum and value are both factors I believe will outperform the market so if I wanted to take as much risk as possible I would hold funds that get deep (concentrated) exposure to them. Alpha Architect has a series of value and momentum ETFs (both US and ex-US) which concentrate in 50 stocks per fund which would be one way to do this (QVAL, QMOM, IVAL, IMOM).

https://alphaarchitect.com/2015/03/26/t ... trategies/

Then if I were really a risk taker I would consider adding a little leverage to that portfolio via a margin loan, just to spice things up a bit more... realistically I wouldn't do either of those things, but I do use a lot of their value ETFs in my portfolio...
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm
Jags4186 wrote: Wed Mar 24, 2021 2:34 pm Leveraged ETFs are great on the way up, bad on the way down, and bad in a sideways market.

Here’s how an actual LETF performed over the past 15 years or so. You’ve only been outperforming the market since March 2020.
Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You have to show me the data on that one.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:29 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:06 pm
tradri wrote: Wed Mar 24, 2021 2:57 pm
MotoTrojan wrote: Wed Mar 24, 2021 2:46 pm Read this OP in detail. Holding just a 3x equity ETF makes no sense, it looks great since inception but a real prolonged drawdown will dig a hole that can't be fixed.

From 1955-today it is about tied with the raw S&P500, but it had several 97%+ drawdowns, no thanks.

viewtopic.php?t=272007
I read through Hedgefundie's post and most of the posts he linked (didn't have time to read through the thousands of replies though), but from what I can tell he only said that going 100% UPRO would lead to "super deep drawdowns", which is true. But the same can be said for a stock/bond portfolio vs a 100% stock portfolio as well, right?

I know that "risk parity" can definitely produce better risk-adjusted returns, but I am for now interested in a strategy that can achieve the highest absolute returns long-term.

Also, where did you get the -97% drawdown from?
Hedgefundie data. The Portofolio Visualizer plot there is SSO, a 2x fund. Simulated UPRO had a 97% monthly drawdown in the GFC, I would assume it was close to 99% intra-month.

As I said, it took from 1955 to ~2019 for simulated UPRO to catch up with a 100% S&P500 investment. If that sounds appealing to you, then go for it. I think it is one of the worst investment ideas imaginable. If you want to take on extra volatility and drawdown and have an expectation to beat the market then go all-in on deep-value and deep-momentum (25/25/25/25 QVAL/IVAL/QMOM/IMOM would be my suggestion) and add some leverage to that.
Can you provide me with a link to the actual research Hedgefundie did?

Where do you get the data that shows that a 3x leveraged ETF would have underperformed from 1955 up until recently?

Multi-factor investing probably works, I have no doubt about that. I am just interested if leveraged ETFs work even better. (not taking into account the Sharpe ratio)
I don't have the link handy but there were posts to the simulated UPRO data going back to 1955 (and at one point links to the raw data to upload yourself). If you want to trust a page that has no info on how the backtest was generated that is all you, but the hedge thread had a lot of iteration and detail on the calcs.

Also are you not at all intrigued by this real-life fund that is only 2x leverage yet has vastly underperformed over nearly every rolling period of the last 23 years?

https://www.portfoliovisualizer.com/bac ... ion1_1=100
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:37 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
fingoals wrote: Wed Mar 24, 2021 3:08 pm
Tamarind wrote: Wed Mar 24, 2021 3:01 pm
tradri wrote: Wed Mar 24, 2021 2:50 pm

Yes, leveraged ETFs only outperform the market when it's going up. But since we all know that in the long run "stonks only go up" I am interested if it would make sense as a long-term investment nonetheless, if you are willing and able to hold through the insanely deep crashes.
Nah. If you really want leverage what would make sense is to borrow money and invest it in a plain vanilla long index ETF. Ie. "lifecycle investing". Also, the underwriting and personal risk assessment of the loan interest rate and payback requirements will help keep the true riskiness front and center.

Leveraged ETFs do not perform at triple the performance of unleveraged ETFs over the long term. Over the long term we assume and hope the market will go up. But over the long term we are also nearly guaranteed it will also drop sometimes. There's a reason most of them say clearly in the prospectus they are only for intra-day trading.
"... it will also drop sometimes" - As long as it doesn't drop more than 34% in a day (for 3x leveraged ETF) and assuming overall uptrend in the long term - which is the foundational assumption of the BH philosophy, as I understand it - subsequent daily upward movements should make up for occasional losses and outperform the market overall (see my comment above). Am I missing something?
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You have to show me the data on that one.
If I had it handy I would, but I don't have to do anything :sharebeer. Trying to do you a solid and warn you. Maybe ask some of the HF-thread regulars if they can show it (hydromod probably has it).
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

nisiprius wrote: Wed Mar 24, 2021 3:11 pm I think you need to make a complete separation between two completely different things:

a) Investing in the stock market using 3X leverage (with an actual loan and a possibility of losing more money than you invested)
b) Investing in the stock market using daily-3X-leveraged ETFs.

They shouldn't be mentioned in the same breath, as the risk and return characteristics of the two are very different.

3X products are pretty new. None of them shows performance during the global financial crisis. We can look at an example of how a 2X leveraged product performed, though. According to the factsheet for ULPIX from ProFunds:
Fund performance and index history
The UltraBull ProFund seeks daily investment results, before fees and expenses, that are 2x the return of the S&P 500® (the "Index") for a single day, not for any other period.

Inception 12/26/1997

Periods greater than one year are annualized.

Investor Class NAV Total Return [since] inception, 6.99%
Service Class NAV Total Return [since] inception, 5.97%
S&P 500, 8.14%
Image

Get that? The fund provider's factsheet shows that the "2X" fund not only failed to double the S&P 500, it underperformed the S&P 500.

If you knew this already and have a clear understanding of why it happened, then, no problem.
Yeah, but this assumes that you invested in the market at the worst possible time, and that you only invested once, and that a big part of your investment life would be dominated by the "lost decade" from 2000-2010.

I think it makes more sense to look into simulated long-term performances one can expect from these funds.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:40 pm

Yeah, but this assumes that you invested in the market at the worst possible time, and that you only invested once, and that a big part of your investment life would be dominated by the "lost decade" from 2000-2010.

I think it makes more sense to look into simulated long-term performances one can expect from these funds.
Look at average rolling returns, the S&P500 wins in all but the 1 year case. You don't seem interested in learning, you only seem interested in validation of your point. I think that backtest you showed ignores interest/swap-costs frankly and wouldn't trust it at all.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by jarjarM »

tradri wrote: Wed Mar 24, 2021 3:37 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:10 pm
From 1955-2019 a 3x S&P500 fund would've been about tied with a regular S&P500 fund so yes you are missing something if you think over the long-term it is a certainty that these products will "outperform the market overall".
You have to show me the data on that one.
This is simulated TQQQ data. TQQQ has yet to reach its 1999 level while QQQ is almost 6x. Volatility decay is very real.

Here is the link
Image

Here is the link to the data MotoTrojan referred to. You really need to read the whole thread (at least the first 10+ pages).

viewtopic.php?p=4426328#p4426328
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

jarjarM wrote: Wed Mar 24, 2021 3:43 pm

viewtopic.php?p=4426328#p4426328
Thanks jarjarM!

For ease, here is the money-maker.

Image
Last edited by MotoTrojan on Wed Mar 24, 2021 3:47 pm, edited 1 time in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by nisiprius »

Makefile wrote: Wed Mar 24, 2021 3:32 pm
nisiprius wrote: Wed Mar 24, 2021 3:28 pm
Makefile wrote: Wed Mar 24, 2021 3:11 pmWell the prospectus has the giant warning I posted above saying it doesn't necessarily track even the right direction if held more than one day. I assume the warning is an SEC requirement. Could someone shed light on when that "error" would and wouldn't happen?
It "would" have happened just within the last couple of years, Q1-Q3 of 2020. The warning isn't theoretical. Starting with $10,000,

⬆︎⬆︎⬆︎ S&P theoretical investment up $557.35; real-world index fund, VFIAX, up $554.59
⬇︎⬇︎⬇︎ UPRO "3X" investment, down $1.983.12.
That's what I thought, but I suppose the long HEDGEFUNDIE UPRO thread had legitimized UPRO somewhat in the back of my mind. So it sounds like long term holding of these leveraged ETFs is like seeing a red button tagged "do not press the red button" and going ahead to press it?
I think many of the people in the HEDGEFUNDIE threads, including HEDGEFUNDIE, know what they're doing, and would regard what I posted above as well-understood and self-evident. I also think that they consciously accept, or at least say they accept, a level of risk that I could not possibly accept. HEDGEFUNDIE's own presentation of his strategy says this to would-be adopters:
Ok, you’ve convinced me. Let me copy what you're doing.

This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
HEDGEFUNDIE was not "legitimizing UPRO," he was saying that it was possible, using financial engineering, to construct a legitimate strategy that included UPRO as one of its moving parts. Other parts included a leveraged bond ETF, a specific rebalancing discipline, and at least one active-managed change in asset allocation during a less-than-two-year period.

You can't get from HEDGEFUNDIE saying something like "sophisticated strategy that happens to use UPRO that might be interesting to experiment with, using a limited amount of one's net worth on which you can afford a total loss" to "holding a 3x leveraged ETF on a broad index like the S&P 500 for the long-run."
Last edited by nisiprius on Wed Mar 24, 2021 3:58 pm, edited 2 times in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by jarjarM »

OP, as I mentioned to you on the other thread (Leveraged simulated data), you really need to understand the risk. MotoTrojan was an early practitioner of HFEA so he knows what he's talking about. Best to do your own DD and backtest to understand the risk of volatility decay before you dive in. There's multiple threads on 3x LETF on the forum but NO ONE is advocating buy and hold forever for a reason.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by fingoals »

MotoTrojan wrote: Wed Mar 24, 2021 3:34 pm
fingoals wrote: Wed Mar 24, 2021 3:29 pm

What do you mean by "deep-value/deep-momentum"? Could you clarify that and a relevant combination strategy with "a little leverage"?
Momentum and value are both factors I believe will outperform the market so if I wanted to take as much risk as possible I would hold funds that get deep (concentrated) exposure to them. Alpha Architect has a series of value and momentum ETFs (both US and ex-US) which concentrate in 50 stocks per fund which would be one way to do this (QVAL, QMOM, IVAL, IMOM).

https://alphaarchitect.com/2015/03/26/t ... trategies/

Then if I were really a risk taker I would consider adding a little leverage to that portfolio via a margin loan, just to spice things up a bit more... realistically I wouldn't do either of those things, but I do use a lot of their value ETFs in my portfolio...
Understood. Thank you for the clarifications and the link (will read later).

I still like a SMA200-based 3x UPRO/TMF rotational leveraged strategy better due to being quite simple and more diversified with low max drawdowns.
Last edited by fingoals on Wed Mar 24, 2021 3:50 pm, edited 1 time in total.
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tradri
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 3:23 pm As to the articles in the OP, they don't provide enough data on the backtest for me to be comfortable believing it. They mention 1% expense ratios, but say nothing about how the estimated the interest/swap payments on the leverage. If they missed those, it is a joke.
The original article is based on a research paper, but as I already said, it only used the price index.

The interest rates they would have to pay to accomplish the leverage will definitely be way smaller than any loan I could personally get myself, so I think assuming maybe 0.25% p.a. or something similar for a very short-term loan/option/derivative isn't crazy, in my opinion.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by jarjarM »

tradri wrote: Wed Mar 24, 2021 3:47 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:23 pm As to the articles in the OP, they don't provide enough data on the backtest for me to be comfortable believing it. They mention 1% expense ratios, but say nothing about how the estimated the interest/swap payments on the leverage. If they missed those, it is a joke.
The original article is based on a research paper, but as I already said, it only used the price index.

The interest rates they would have to pay to accomplish the leverage will definitely be way smaller than any loan I could personally get myself, so I think assuming maybe 0.25% p.a. or something similar for a very short-term loan/option/derivative isn't crazy, in my opinion.
Interest rate was much higher during the late 70s to early 80s even for short term funding.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by MotoTrojan »

tradri wrote: Wed Mar 24, 2021 3:47 pm
MotoTrojan wrote: Wed Mar 24, 2021 3:23 pm As to the articles in the OP, they don't provide enough data on the backtest for me to be comfortable believing it. They mention 1% expense ratios, but say nothing about how the estimated the interest/swap payments on the leverage. If they missed those, it is a joke.
The original article is based on a research paper, but as I already said, it only used the price index.

The interest rates they would have to pay to accomplish the leverage will definitely be way smaller than any loan I could personally get myself, so I think assuming maybe 0.25% p.a. or something similar for a very short-term loan/option/derivative isn't crazy, in my opinion.
More like 2x the T-bill, which was order of magnitude and then some above 0.25% for the period of your backtest.

Just gonna post this again to really make sure it sinks in.

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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by tradri »

MotoTrojan wrote: Wed Mar 24, 2021 3:27 pm
tradri wrote: Wed Mar 24, 2021 3:25 pm

Leveraged ETFs surely provide a whole different risk/reward tradeoff with their volatility decay, but maybe it's worth pursuing if it means that you go with 3x leveraged ETFs and take on 3x the volatility for getting about 2x the returns long-term. (http://www.ddnum.com/articles/leveragedETFsandDCA.php)

Also, just because they have a warning doesn't mean one can't investigate how these products might have performed over very long periods of time.
If you want to trust this backtest that is up to you, but I have not seen any convincing data to suggest you should expect 2x the returns long-term. The live fund example posted above looked closer to matching the market (slightly underperforming through most rolling periods) and the 1955-2019 UPRO simulated case I noted was tied over a very long timeframe that ended after a historic bull run.

If you want to endure 97% drawdowns for the possibility of matching the market, you do you. Beating the market by 1-2% over a lifetime can have huge payoffs, but this isn't the way to do it.
The live fund example surely is disappointing, but I don't think the last 20 years are necessarily the most representative time period.

I am still looking into it, and I haven't seen much convincing data myself (which is why I started the thread) but I think the potential reward of achieving maybe 2x the S&P 500 long-run return is such a huge pay-off, that it would make sense to investigate it further.
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