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

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

Post by yellowJackets »

NIOMARVIN83
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by NIOMARVIN83 »

The only thing I can say is to be very careful. We've learned the hard way from simcasts, and now we're just investing in inexpensive market index funds. As for the articles in the OP, they do not provide enough data on the backtest to be able to verify the accuracy of the data. They always indicate cost ratios of 1%, but say nothing about how interest payments are estimated at leverage.
Ramjet
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Ramjet »

chris319 wrote: Tue May 25, 2021 2:55 pm For an unmargined investor, of what consequence are the drawdowns other than purely psychological?
Sorry if I missed it but are you pairing your leveraged ETF with a bond ETF or similar, e.g., LTT, ITT, or cash?

If so, besides the chance of underperformance because of market conditions, yeah, much of the risk is psychological

If not, and you are holding the LETF in isolation, well during a drop of 50% or more your LETF could drop much more than that and take a much longer time to recover than an unleveraged investor. Basically, underperforming the normal fund by a great deal
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chris319
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by chris319 »

besides the chance of underperformance because of market conditions, yeah, much of the risk is psychological
I was 100% TQQQ (3x) through the covid crash of 2020. It takes some of the wind out of your sails but I held on and was well rewarded by year's end.

I have since downshifted to half 2x and half 3x, giving me 2.5x leverage. Testing shows that 3x is suboptimal when a bear market is encountered. 2x does better through more types of market conditions.
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meir13
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by meir13 »

I would like you, to compare classic 70/30 UPRO/TMF vs more defensive 25/35/20/20 UPRO/TMF/TQQQ/TYD or even more defensive 20/20/20/40 UPRO/TMF/TQQQ/TYD vs PIMCO StocksPLUS Long Duration Instl. Volatilty. UPRO/TMF/TQQQ/TYD portfolio set-up I found, when I was looking for PIMCO StocksPLUS Long Duration Instl. Volatilty leveraged option DIY way.


https://www.portfoliovisualizer.com/bac ... tion8_3=40
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by junior »

chris319 wrote: Tue May 25, 2021 2:55 pm Period = 50 years

Initial investment = $10,000

At 4% CAGR: final value = $71,067

At 5% CAGR: final value = $114,674, more than 61% higher

For an unmargined investor, of what consequence are the drawdowns other than purely psychological?
Is the source of that CAGR holygrailtradingstrategies.com? If so why should I believe that web site? It's not just a theoretical question, you'll be asking yourself that after your portfolio drops 70%.
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OohLaLa
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by OohLaLa »

meir13 wrote: Fri Jun 04, 2021 12:52 pm I would like you, to compare classic 70/30 UPRO/TMF vs more defensive 25/35/20/20 UPRO/TMF/TQQQ/TYD or even more defensive 20/20/20/40 UPRO/TMF/TQQQ/TYD vs PIMCO StocksPLUS Long Duration Instl. Volatilty. UPRO/TMF/TQQQ/TYD portfolio set-up I found, when I was looking for PIMCO StocksPLUS Long Duration Instl. Volatilty leveraged option DIY way.


https://www.portfoliovisualizer.com/bac ... tion8_3=40
Based on the link you provided, I think you played around with CASHX and the non-leveraged funds in your backtests, but I'll add this in case you didn't:
https://www.portfoliovisualizer.com/bac ... ion10_3=90

I basically replicated the AA options you proposed, but it allows you to see all the way back to 2007. As you can notice, the difficulties were much higher when you move backwards from 2011. Keep in mind that drawdowns in PV are monthly only, so imagine them as being worse intra-month. Something worse than -75% can wreck havoc on someone's mental state.

Long-term, I would definitely steer someone towards the safest mix you proposed. Even then, I would suggest going down in leverage if the idea is to stick with this permanently, even if the results are not as sexy. The safest 3x option surviving something like 2008 (in theory!) is already a superb sign but that amount of leverage can become extremely dangerous when you factor in the unexpected. It's not the type of gamble I would suggest for someone late in their career or someone who decided to retire and withdrawing from the portfolio.

Some specific points in relation to application:
- You propose TYD but you can encounter liquidity-related issues (difficulty to fill, huge spread) due to the low popularity of that particular EFT. This is not a problem at low $ amounts, but you'd be surprised how quick you can arrive at that point. You can look up AUM + volume on something like Yahoo. You can look into a TYD + UST + IEF blend, down the road, if necessary.

- You can't entirely discount the closure of 3x funds, at possibly the worst moment. Not every leveraged or specialized fund lasts that long (Barclays, Credit Suisse, Proshares, Direxion). The ones that get dramatically wound down are typically futures-based, inverse and/ or leveraged, but I would not discount it happening to an index-tracking, swap-based fund in the middle of a crisis.

Looking at the funds you mention, I imagine you already lurked around the Hedgefundie thread. If not, dive in to expose yourself to a plethora of different ideas.
jackbeagle
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by jackbeagle »

What is the way to get that kind of leverage on an ETF? In my after-tax investing account, I can borrow on margin but I think I'm limited to borrowing 50% of my account value. Starter here. No big relationship.
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OohLaLa
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by OohLaLa »

jackbeagle wrote: Fri Jun 04, 2021 2:31 pm What is the way to get that kind of leverage on an ETF? In my after-tax investing account, I can borrow on margin but I think I'm limited to borrowing 50% of my account value. Starter here. No big relationship.
Disclaimer: this is a Bogle-inspired forum, so the idea of leveraged portfolios is definitely NOT supported, in general. I definitely understand why, as it's historically much, much riskier. I mean like almost total loss risk, which is not expected with a diversified, balanced 1x portfolio. I am investing most of new funds into a diversified but leveraged portfolio, but I am continuously de-risking and then de-leveraging as I get older (or if everything implodes for some reason :( ). Here's my 2 cents if you want to look into it, nonetheless.

FYI: I have almost 0 knowledge of options/ futures so I cannot help implement that, or give info on the nitty gritty details.

Two options I know are:
- Margin trading, either through direct ETF purchase on loan or options/ futures. For this, I suggest the Hedgefundie thread as there are some very knowledgeable folks concerning this topic.
- Packaged, leveraged ETFs/ ETNs.

Unless you are very comfortable with margin and options trading + want to continuously monitor and actively manage your positions then I say you should avoid that option like the plague. You can potentially save on borrowing rates versus the fees of the leveraged funds, but you pay for it in involvement and, imo, risk. You say you are a "starter" so I would definitely avoid margin.


Pros of margin option:
- lower costs
- flexibility in what you can invest in, with leverage.

Cons of margin option:
- requires active monitoring and reaction (including funding, selling) in cases of margin calls. I recall there being a poster that got margin-called a few times in the span of a month or something crazy like that.
- good chance of forced liquidation during a crisis.
- difficulty maintaining fixed leverage percentage, as prices fluctuate.
- possibility of incurring debt.


Pros of leveraged funds option:
- passive approach, with fund managers running the show.
- no forced liquidation due to volatility. I would say an exception is when a fund gets closed during or after a crisis, which would require something massive (ex: Credit Suisse reaction to VIX crash). Even in that case, it's not quasi-immediate.
- guaranteed to be leveraged at desired level, from day to day, for funds with daily leverage reset (make sure this is the case). If you decide you only accept 2x leverage, due to risk aversion, then you will not be thrown out of bounds like you will on margin.
- max loss is principal invested. No possibility of liabilities.

Cons of leveraged funds option:
- limited choice of investments with good liquidity. This is normally only a problem if you are looking for something more exotic.
- relatively high fund fees + borrowing costs can go up.

Please add or correct any mistakes I might have made. :)
jackbeagle
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by jackbeagle »

I wouldn't be the one correcting anything. Anyone with even some knowledge on it would know more than I do!

After-tax is my "let's see what happens when I pull this lever" account. My 401k limits me to a few safe fund choices (and rightfully so) to keep me on track toward having a retirement.
chris319
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by chris319 »

Is the source of that CAGR holygrailtradingstrategies.com? If so why should I believe that web site? It's not just a theoretical question, you'll be asking yourself that after your portfolio drops 70%.
There is no data involved. It's a standard future value calculation.

https://www.investopedia.com/terms/f/futurevalue.asp
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keith6014
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by keith6014 »

jackbeagle wrote: Fri Jun 04, 2021 2:31 pm What is the way to get that kind of leverage on an ETF? In my after-tax investing account, I can borrow on margin but I think I'm limited to borrowing 50% of my account value. Starter here. No big relationship.
If the ETF has an option then deep in the money with 1year+ expiration is relatively safe. You can control leverage by how deep you go (delta). The downside is they are expensive and if there is a market crash in your horizon you lose the option.

You can also buy an index ($XSP) which is tax friendlier. They are treated with 60/40 rule; 60 longterm and 40 short term.
meir13
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by meir13 »

OohLaLa wrote: Fri Jun 04, 2021 2:27 pm
meir13 wrote: Fri Jun 04, 2021 12:52 pm I would like you, to compare classic 70/30 UPRO/TMF vs more defensive 25/35/20/20 UPRO/TMF/TQQQ/TYD or even more defensive 20/20/20/40 UPRO/TMF/TQQQ/TYD vs PIMCO StocksPLUS Long Duration Instl. Volatilty. UPRO/TMF/TQQQ/TYD portfolio set-up I found, when I was looking for PIMCO StocksPLUS Long Duration Instl. Volatilty leveraged option DIY way.


https://www.portfoliovisualizer.com/bac ... tion8_3=40
Based on the link you provided, I think you played around with CASHX and the non-leveraged funds in your backtests, but I'll add this in case you didn't:
https://www.portfoliovisualizer.com/bac ... ion10_3=90

I basically replicated the AA options you proposed, but it allows you to see all the way back to 2007. As you can notice, the difficulties were much higher when you move backwards from 2011. Keep in mind that drawdowns in PV are monthly only, so imagine them as being worse intra-month. Something worse than -75% can wreck havoc on someone's mental state.

Long-term, I would definitely steer someone towards the safest mix you proposed. Even then, I would suggest going down in leverage if the idea is to stick with this permanently, even if the results are not as sexy. The safest 3x option surviving something like 2008 (in theory!) is already a superb sign but that amount of leverage can become extremely dangerous when you factor in the unexpected. It's not the type of gamble I would suggest for someone late in their career or someone who decided to retire and withdrawing from the portfolio.

Some specific points in relation to application:
- You propose TYD but you can encounter liquidity-related issues (difficulty to fill, huge spread) due to the low popularity of that particular EFT. This is not a problem at low $ amounts, but you'd be surprised how quick you can arrive at that point. You can look up AUM + volume on something like Yahoo. You can look into a TYD + UST + IEF blend, down the road, if necessary.

- You can't entirely discount the closure of 3x funds, at possibly the worst moment. Not every leveraged or specialized fund lasts that long (Barclays, Credit Suisse, Proshares, Direxion). The ones that get dramatically wound down are typically futures-based, inverse and/ or leveraged, but I would not discount it happening to an index-tracking, swap-based fund in the middle of a crisis.

Looking at the funds you mention, I imagine you already lurked around the Hedgefundie thread. If not, dive in to expose yourself to a plethora of different ideas.
I made some more back testing going back to 1999.
First link includes 70/30 UPRO/TMF clone, UPRO/TMF/TQQQ/TYD clones plus S&P 500.
https://www.portfoliovisualizer.com/bac ... ion10_3=90
While 70/30 UPRO/TMF clone almost lost its total value in simulation. From my experience in real life slightly better results are achieved due to the ETFs daily resets. BTW There was never my intention to invest in 70/30 UPRO/TMF portfolio, nor it was my suggestion to the others.

Second includes PIMCO StocksPLUS Long Duration Instl. Volatilty clone, UPRO/TMF/TQQQ/TYD clones plus S&P 500.
https://www.portfoliovisualizer.com/bac ... on10_3=100
Here the situation gets more interesting. Max Drawdown of less aggressive UPRO/TMF/TQQQ/TYD clone and S&P 500 are not far from each other, yet CAGR of S&P 500 is 11% lower compare to the less aggressive UPRO/TMF/TQQQ/TYD clone.

You are absolutely right, this is not for someone whom may need to cash out of portfolio soon.

TYD concern. I know well about liquidity-related issues. I added TYD solely to improve CAGR, while Max Drawdown didn't increased over too much(this worked well in past 10 years). You can always replace, TYD with TMF or even TQQQ with UPRO. Increase ratio on TMF by 5% to 10%. There are many options available.
https://www.portfoliovisualizer.com/bac ... on10_3=100
Then 35/65 UPRO/TMF could be very attractive as well(but volatile).

As you mentioned, there is danger that the 3x etfs as well as reverse or other leveraged ones, will close down for whatever reason. There were closed in the past.

All I wanted was to hear your thoughts on this matter. My tax situation is specific(no capital gains, 30% tax stock dividend and distributions). So was looking for solution to hold portfolio similar to PIMCO StocksPLUS Long Duration Instl. Volatilty with some extra leverage and little as possible direct distributions. With no need for margin financing as this kind of portfolio can be held in cash account.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by chris319 »

Why would one hold a 3x stock fund together with a 3x bond fund? If you want less leverage just go with a 2x or 1x stock fund.
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OohLaLa
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by OohLaLa »

meir13 wrote: Fri Jun 04, 2021 5:49 pm

I made some more back testing going back to 1999.
First link includes 70/30 UPRO/TMF clone, UPRO/TMF/TQQQ/TYD clones plus S&P 500.
https://www.portfoliovisualizer.com/bac ... ion10_3=90
While 70/30 UPRO/TMF clone almost lost its total value in simulation. From my experience in real life slightly better results are achieved due to the ETFs daily resets. BTW There was never my intention to invest in 70/30 UPRO/TMF portfolio, nor it was my suggestion to the others.
Yeah, 1999-forward was a nice perspective. I remember playing around with that and telling myself that must have been one of the worst times to lump-sum, especially into the 3x Nasdaq. lol

Daily reset would definitely be better, but there is no two ways about it: it would have been an abject failure. 15 years to get back.

meir13 wrote: Fri Jun 04, 2021 5:49 pm All I wanted was to hear your thoughts on this matter. My tax situation is specific(no capital gains, 30% tax stock dividend and distributions). So was looking for solution to hold portfolio similar to PIMCO StocksPLUS Long Duration Instl. Volatilty with some extra leverage and little as possible direct distributions. With no need for margin financing as this kind of portfolio can be held in cash account.
With that kind of taxation scheme, you are good with any of the Direxion or Proshares funds you mentioned, definitely. Distributions barely register. Last year was a bit of an exception because, at the end of the year, they did returns of capital; for most of the funds it was insignificant (approx 1% or less) while something like TYD is very surprising, with what seems like 10%. I find this hard to believe (mistake???) but you would notice that on your end.

I follow the same line of thinking: no need to deal with margin and everything it entails + I can do this in a tax-deferred account. What's not to like. :beer
Semantics
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by Semantics »

chris319 wrote: Fri Jun 04, 2021 7:37 pm Why would one hold a 3x stock fund together with a 3x bond fund? If you want less leverage just go with a 2x or 1x stock fund.
If stocks and bonds remain uncorrelated, you'll get the volatility of lower leverage (1.5x if you hold them in equal proportions) equities, but higher returns.

Imagine there were two ETFs that always moved in opposite directions, but in the long run had the same (positive) returns and volatility. Would you pick just one and put half your money in it, the other half in cash? Or would you put half your money in one and half the money in the other? Easy choice.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by meir13 »

OohLaLa wrote: Fri Jun 04, 2021 7:39 pm
With that kind of taxation scheme, you are good with any of the Direxion or Proshares funds you mentioned, definitely. Distributions barely register. Last year was a bit of an exception because, at the end of the year, they did returns of capital; for most of the funds it was insignificant (approx 1% or less) while something like TYD is very surprising, with what seems like 10%. I find this hard to believe (mistake???) but you would notice that on your end.

I follow the same line of thinking: no need to deal with margin and everything it entails + I can do this in a tax-deferred account. What's not to like. :beer
Leveraged ETF distributions are most likely taxed as capital gains. So I am covered there. My comment was related to the more normal funds, these do make distributions in form of dividends.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by chris319 »

TQQQ

2/19/2020 close: 59.03

3/20/2020 close: 17.75

69.9% drawdown

6/7/2021 close: 104.90

Up 76% from peak on 2/19/2020.
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meir13
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by meir13 »

chris319 wrote: Tue Jun 08, 2021 1:39 am TQQQ

2/19/2020 close: 59.03

3/20/2020 close: 17.75

69.9% drawdown
regular QQQ
2/19/2020 close: 236.98
3/20/2020 close: 170.70
27.97% drawdown

so daily reset helped TQQQ to be about 14.90% better compare to plain 3xQQQ when market was going under at this sample period.


Of course, when market is rising, TQQQ will be slower to gain momentum vs plain 3xQQQ.

I would say, the whole matter is more about keeping clear mind and not becoming too stressed by market down turn movements.

More or less, you can sit out TQQQ down fall. But having plain 3xQQQ, you will have margin call or broker will have to close your position(that is if broker allows a such concentrated position at first). This applies, when each position will be funded with the same amount of money(I believe plain 3xQQQ must held under portfolio margin as long you like to keep it overnight. Good luck with broker risk management).

Also one important matter related to margin calls or broker liquidating your position. No matter how strong personality you are, it will affects your ability to decide proper way or even some worse situations.
chris319
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by chris319 »

What broker is going to sell you $100 worth of QQQ for $33, which is what I think you're suggesting?

What kind of interest are you going to pay on that margin loan? With TQQQ there is no margin interest.
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by cos »

meir13 wrote: Thu Jun 10, 2021 4:00 pm Of course, when market is rising, TQQQ will be slower to gain momentum vs plain 3xQQQ.
The opposite is true. Daily releveraging allows TQQQ greater exposure to long stretches of upward movement compared to less frequently rebalanced margin leveraged strategies. In other words, when the market is rising, TQQQ is faster to gain momentum versus plain 3xQQQ.

Think about it this way:
  • I put $100 in TQQQ and $300 in QQQ financed with a -$200 margin loan.
  • When the market goes up 1%, I'll have $103 in TQQQ and $303 in QQQ with a -$200 margin loan.
  • When the market goes up 1% again, I'll have $106.09 in TQQQ and $306.03 in QQQ with a -$200 margin loan.
  • TQQQ = $106.09
  • QQQ = $306.03 - $200 = $106.03
  • TQQQ > QQQ
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cos
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Re: Are 3x leveraged ETFs the long-term winning strategy?

Post by cos »

chris319 wrote: Thu Jun 10, 2021 6:04 pm With TQQQ there is no margin interest.
That may be literally true, but keep in mind that with TQQQ, you still have to pay the overnight lending rate on the swaps in addition to that hefty expense ratio.
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