To add to my earlier post....it is interesting to see what is classified as risky and not risky. For instance, it is widely accepted for a person with a long investing horizon and high risk tolerance to be somewhere between 80-100% equities. While in the accumulation and wealth building phase, it is important to take on more risk in order to open yourself up for greater reward. When drawing closer to retirement and the wealth preservation stage, it is prudent to be more efficient with your reward/risk and get back down to 50% equity or less.
Now, let's take a look at a few examples and see where leveraged ETFs can be beneficial for holding long term. The backtest below uses S&P 500 for stocks and 7-10 year treasuries for bonds. VUSTX is used as a proxy for UST, the 2X ETF for 7-10 year treasuries. The second link shows that they have similar behavior. The backtest begins in 2006, the inception for SSO, the 2X leveraged ETF for the S&P 500.
Portfolio 1 represents a 50/50 portfolio. Portfolio 2 is an 80/20 portfolio. If you were to add 2X leverage (via leveraged ETFs) to the more efficient 50/50 portfolio, you would get Portfolio 3. You would end up with about the same drawdown as the 80/20 portfolio. However, because you are investing at a more efficient point and then adding leverage, you end up with a better return for similar risk. It is true that the return would be even better if it weren't for volatility drag and additional fees, but that is just the nature of taking on more risk and the associated reward/risk inefficiencies. As I said before, just about everyone is ok with the inefficiencies involved with going from a 50/50 portfolio to a 80/20 or 100/0 portfolio. Therefore, what is wrong with taking on some inefficiencies due to volatility drag and some additional fees?
Jul 2006 - Dec 2018
Portfolio 1 - CAGR = 7.0%, Max DD = -20.1%
Portfolio 2 - CAGR = 7.7%, Max DD = -39.3%
Portfolio 3 - CAGR = 10.6%, Max DD = -41.9%
S&P 500 - CAGR = 7.7%, Max DD = -51.0%
https://www.portfoliovisualizer.com/bac ... tion4_3=50
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Now this statement will be a little Devil's advocate....If Vanguard, or any broker, is looking out for their client's best interests, should they also not allow us to invest 80-100% of our money in stock funds? This example shows that it's just as risky, if not more risky, than a diversified use of leveraged ETFs.