+1samsdad wrote: ↑Sun Sep 08, 2019 12:14 pmBack in the original HF-excellent-adventure thread, I posted this:
viewtopic.php?f=10&t=272007&p=4407878&h ... g#p4407878
In that post I quote from a paper that can be found here: https://www.sciencedirect.com/science/a ... via%3Dihub
Some quotes from that post (and the paper, all emphasis mine):
If anyone has any studies that contradict the findings of that paper, I'd be interested in viewing them.(samsdad) What is news to me is that apparently the warning about volatility decay (no matter the market conditions) that I've seen beaten to death in other threads, and to a lesser extent here; and the fundamental idea that holding these for more than a few days is dangerous is ostensibly not supported by data from the entire history of the Dow Jones Industrial Average starting in 1896 through 2010, and the S&P 500 data from 1958 through 2010. From the paper (my emphasis in bold):Further into the paper:The poor tracking performance of daily-rebalanced LETPs during the financial crisis of 2007–2009 has led the SEC, FINRA, the financial media, and investment advisors to warn investors that these daily-rebalanced LETPs are not suitable for long-term strategies. However, these comments are not conclusive for at least three reasons. First, because LETPs have a short history, the warnings are based on a small sample. Second, the financial crisis was a unique global event, and generalizations from it should be tempered. Third, a comprehensive framework to determine the effective multiple for LETPs with different rebalancing frequencies over various holding periods has yet to be provided.
To address these points, we test for additional perspectives on the deviations of LETP target returns and multiples from their naively expected counterparts by using more than a century’s history of the Dow Jones Industrial Average (INDU) over various investment horizons. We begin with the daily-rebalanced LETPs, which are designed to deliver a constant daily leverage. Contrary to public criticism, we find that, on average, LETP target returns, over various holding periods, perform largely in line with, and no worse than, their naive expected returns, defined as the product multiple times the cumulative returns of their underlying indices during the holding period. The holding periods include calendar months, calendar years, rolling two days, three days, and up to 2500 trading days.
And:These findings show that if an investor’s investment horizon is one calendar year, on average, the compounding effect is beneficial to the performance of a (2x) fund. . . . These findings show that the compounding effect is more likely to be positive than negative, and stands in contrast to the popular media assertion that LETPs are not suitable for long-term investors. . . . The rest of Panel B illustrates that this calendar-year positive compounding effect also applies to the (3x) . . . daily-rebalanced LETPs.
The S&P 500 exhibits the same behavior as the DJIA:Illustratively, for all periods – from two to 2500 trading days – Fig. 1 plots the average cumulative return deviation over the number of holding days by adding one trading day at a time. It shows that the average return deviation is positive for all five daily-rebalanced LETPs. In addition, as the number of holding days increases, the return deviation also increases. These findings confirm the conclusion from Table 1 that the daily-rebalanced LETP compounding effect, on average, can be beneficial to investor performance, which runs counter to media reports and public warnings.
And, management fees don't fundamentally change the picture:Our results in Table 1 show that the compounding effect, on average, does not negatively impact the performance of the INDU LETFs. One might be concerned, however, that the INDU may not be representative of a broader U.S. stock market. To address this concern, we carry out the same analysis by using the publicly accessible history of the S&P 500 index (SPX). As shown in Table 6, for the holding period of a calendar year or longer, the compounding deviation registers a positive mean, confirming that the compounding deviation enhances LETF performances on average. In addition, the medians of the compounding deviation are also positive, confirming the higher odds of a performance enhancement than not. Overall, the results in Table 6 confirm our findings from Table 1, showing that the compounding effect enhances long-term LETF performances.
In conclusion:As shown in Table 7, the incorporation of the management fee has a small negative impact on the performance of LETPs. However, the fee-adjusted average annual returns of daily-rebalanced LETPs are still higher than their naïve expected counterparts. This confirms that the incorporation of management fees does not change the main conclusion of this paper.In summary, using the long-history real-world data on U.S. stock market indices, our research contributes to the academic literature with new insights into LETPs, well beyond the existing studies on daily-rebalanced LETPs that use short-history data or those based on standard normal simulations. Our theoretical framework and empirical findings reveal the determinants of the return deviation and multiple deviation of various LETPs across rebalancing frequencies and holding periods, and hold the promise of guiding regulators, policy makers, and investors in their understanding of the tracking performance of LETPs.
Otherwise, I agree wholeheartedly with jh:
I honestly couldn't agree more.jh wrote: ↑Sat Sep 07, 2019 9:46 pmIts insulting to me when someone I don't even know wants to prevent me from having access to information. The assumption is that I am not smart enough or mature enough to have access to it. Its extremely arrogant for someone to decide on their own what strangers can/should be able to read about.
As far as the aforementioned "ambulance chasers", let me state as a fellow lawyer that I don't think they are on solid ground here, not that I've seen the results of any litigation in this area. Even so, courts get it wrong all the time. I think the same thing about forcing employers to provide 401k plans that have to have index funds. Don't like your employer's 401k plan options? Too bad, find another job.
Let me illustrate the absurdity of the subject. We are all aware that any individual equity could go to zero practically overnight, if not literally so. Does that mean they shouldn't ever be held by individual investors? Should FINRA or some other nanny agency mandate that they come with a BIG WARNING label? Should we here at bogleheads be prevented from discussing them? Does every discussion that doesn't revolve around the three-fund portfolio need to be carefully monitored by ladygeek, et al., so that we don't tread into "danger"?
Individual liberty comes with a price. Mistakes: irreversible, economically-crushing, life-changing mistakes, are embodied in this concept. Contemplating the censorship (or special-disclaimer treatment) of any investing strategy or product is disgusting.
OP, if you want to shout from the rooftops your belief that leveraged ETFs are the greatest danger to the world since __________, in every thread that pops up, by all means do so. But the remedy isn't the removal of their discussion from this forum. To quote the US Supreme Court (who I think gets it wrong regularly), "the remedy to be applied is more speech, not enforced silence." Whitney v. California, 274 U.S. 357 (1927).
I'll reiterate my invitation to the procurement of studies, based on real-life data, that call into question the paper cited above. Feel free to peruse the original HF thread to see additional excerpts in my posts from said paper.
This type of post is the main reason I bother to (infrequently now) view this forum, unless I am seeking purely factual knowledge - think tax treatment for a particular situation, as an example.
Many ideas are not welcome here, unless one is prepared to defend any thought which does not adhere to the "boglehead philosophy", which does not exist in any pure form. (People have different ideas about what fits within the "boglehead philosophy".)
For those who would dispute my characterization, one would only have to review poster willthrill threads/posts on trend following to see that even a well liked poster has to show admirable dexterity to escape the slings and arrows of those "pure bogleheads" that want to protect the boglehead forum from impure thoughts. Another example is almost any thread with "active management" in the title.
Thank you for this post, because in my opinion, it is important to disagree with the various ideas/forms of censorship, which are extremely common on this forum.