Well, you left out the obvious solution -- futures. The long run difference between S&P futures and the S&P index is IIRC about 10 basis points. Also AFAIK, LEAPs don't include some kind of price adjustment so deliberately exclude dividends to those should be built into their price as well. (ChicagoOne has two types of single stock futures, and one of them does have such an adjustment, but I don't think any CBOE options are like this.) The leveraged ETFs are day trading instruments and should be avoided by long-term investors (though I don't understand why they can't make a 3x S&P ETF that just invests in S&P futures with that leverage level).bond50 wrote:MT is at least half right on the theory of time diversification, absent tax considerations and costs. Take a concrete example of a lawyer that graduates law school at 25 and wants to retire at 55. If he literally didn't believe in leverage, then he would wait until he had paid off his student loans, home loan, and cars loans in full before putting a dime into retirement, at least past the company match if law firms do that. By the time that he starts investing for retirement, he is thirty five. However, he is conservative and wants to glide to 100% bonds by retirement. Hence, he starts to age out of stocks at forty five. Effectively, his stock market performance is largely determined by a ten year period. No one, not even Siegel, would call ten years the long run.
The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls.
There are some negative tax implications to using either futures or options to obtain leverage, but on a pre-tax basis you are always better off going with a more conservative stock/bond allocation (with a higher sharpe ratio) and then slightly leveraging it to obtain your return goals than you are going with an unlevered portfolio with a more aggressive stock allocation. (The leveraged portfolio will have less risk for the same return or more return for the same risk, or something in between.)
You can get around this problem by creating an LLC for the IRA to invest in and then having the LLC invest in whatever you want.Even, if someone in their twenties was comfortable being 150% in stocks, the most logical place for someone that age to invest, IRAs, prohibits buying on margin.
You can get substantially lower margin rates elsewhere. Interactive Brokers will give you margin at 25 basis points above the fed funds rate if your account is big enough. That said, in general I think investing via a margin account is the least preferable way to get leverage. It should only be used when you have no better option or when the tax implications vs futures and LEAPs are sufficient to overcome the higher interest cost.If someone invests in taxable accounts, then taxes narrow the equity spread. Further, for loan balances under $20k, Vanguard brokerage charges interest rates of 7.75%, which is above the yields on even junk bonds.