Leveraged ETFs while we rollover old 401ks?

[boglehat]

We want to consolidate about $700k of old employer retirement accounts into the 401k's of current employers. All our funds are in ETFs via brokerage link. We want to consolidate to have fewer accounts in the name of simplicity.

One way or another, the $700k will be out of the market for order of a week+ while we liquidate and do the rollover. I know mathematically the expected market return for 1 or 2 weeks is not a big deal, but psychologically I'd hate it if for some reason the stock market soared while the money is being rolled over.

Is holding leveraged ETFs while we do the rollover actually a good fit for this use case? E.g. something like:
1. Liquidate $350k of VTI for a rollover
2. Exchange another $350k of VTI and buy $350k of SSO (2x levered S&P 500)
3. Initiate rollover. Wait 1-2 weeks.
4. Sell SSO, and buy back into the $700k VTI position.
Repeat for the remaining 350k (technically can skip step 4 first time).

I don't mind the increased expenses of leveraged ETFs since I'm only holding for a week or 2. However, as a leveraged ETF newby I wanted to ask: am I missing something?

[ruud]

You probably already thought of this, but do you have bonds or other less-volatile assets elsewhere in your portfolio? If so, you could exchange the 401k to bonds and your existing bonds to stocks during the rollover process.

[MrJedi]

Yes you are missing something. You would need to rebalance daily with a levered ETF if you are trying to match equity exposure. Something like margin would be far simpler.

Another even simpler option is to rebalance with bonds during the rollover, as bonds are likely to be far less volatile.

[HMSVictory]

In a 20, 30 or 50 year investing lifetime one week is really irrelevant.

I can tell you that when I rolled over a Roth IRA from one firm to Vanguard my funds were not out of the market for 5 days. Was more like 1-2 days maximum.

[Corvidae]

As MrJedi suggests, most leveraged funds aim to amplify returns on a daily basis. This means even if the fund achieves its objective, the gain/loss over time periods greater than one day may not equal the expected multiple of the benchmark. So there is some risk you could lose more than 2x a decline in the benchmark or fail to gain 2x an increase in the benchmark.

[boglehat]

You probably already thought of this, but do you have bonds or other less-volatile assets elsewhere in your portfolio? If so, you could exchange the 401k to bonds and your existing bonds to stocks during the rollover process.

I should have mentioned but we're 100% stocks outside of our $70k emergency fund. I could technically use that emergency fund to buy stocks and then build it up again (I don't like selling stocks on taxable =P). The leveraged ETF sounded simpler to me in theory as I could do it all in tax advantaged accounts.

[boglehat]

In a 20, 30 or 50 year investing lifetime one week is really irrelevant.

I can tell you that when I rolled over a Roth IRA from one firm to Vanguard my funds were not out of the market for 5 days. Was more like 1-2 days maximum.

When I called Fidelity, they estimated 2 business days for the funds to settle (they are in ETFs), and another 5 days for the rollover.

I know theoretically it's chump change, but practically speaking stock market gains tend to concentrate on a few days, and I'd hate for those few days to be when money is out of the market, especially if I can easily avoid it. I do appreciate the perspective and in the end we might just end up buying the bullet and just doing it the old and simple way, we'll see.

[boglehat]

Yes you are missing something. You would need to rebalance daily with a levered ETF if you are trying to match equity exposure. Something like margin would be far simpler.

Another even simpler option is to rebalance with bonds during the rollover, as bonds are likely to be far less volatile.

Thanks, this is what I was looking for. To make sure I understand this rebalancing business, given an initial balance of $50k cash, $50k 2x levered S&P500 (so $100k exposure to S&P500):
- If the S&P500 increases in a day by 5%, I now hold $50k cash, $55k 2x S&P500 (so $110k exposure to S&P). I would have to sell $2.5k in 2x S&P to get back to the expected $105k exposure to the S&P500.
- If the S&P500 decreases in a day by 5%, I now hold $50k cash, $45k 2x S&P500 (so $90k exposure to S&P). I would have to buy $2.5k in 2x S&P to get back to the expected $95k exposure to the S&P50.

Does that sound mathematically right?

I might not bother for small amounts, but this is useful to understand in the black swan event of high digit % daily moves during the rollover.

[HMSVictory]

In a 20, 30 or 50 year investing lifetime one week is really irrelevant.

I can tell you that when I rolled over a Roth IRA from one firm to Vanguard my funds were not out of the market for 5 days. Was more like 1-2 days maximum.

When I called Fidelity, they estimated 2 business days for the funds to settle (they are in ETFs), and another 5 days for the rollover.

I know theoretically it's chump change, but practically speaking stock market gains tend to concentrate on a few days, and I'd hate for those few days to be when money is out of the market, especially if I can easily avoid it. I do appreciate the perspective and in the end we might just end up buying the bullet and just doing it the old and simple way, we'll see.

Don't forget it could go the other way and benefit you..... your funds clear and the market drops by 3-4% in a day.

When they buy in your getting a lot more shares!

[alex_686]

Not a huge fan of leveraged ETFs but yes, this is a specific situation where they would make sense. Not perfect, but workable.

Futures or deep In-The-Money options would be another choice.

[tashnewbie]

Couldn't you just wait to do the reverse rollover when the market is more "stable"?

Sounds like you may be out of the market 1-2 weeks. I was out almost 3 weeks when I did a reverse rollover in 2020.

It's impossible to predict how the market may go while you're out. But if you're really concerned about this, waiting may be a good option.

[boglehat]

Couldn't you just wait to do the reverse rollover when the market is more "stable"?

Sounds like you may be out of the market 1-2 weeks. I was out almost 3 weeks when I did a reverse rollover in 2020.

It's impossible to predict how the market may go while you're out. But if you're really concerned about this, waiting may be a good option.

If I knew this, I'd quit my job and become a VIX trader

[tashnewbie]

Couldn't you just wait to do the reverse rollover when the market is more "stable"?

Sounds like you may be out of the market 1-2 weeks. I was out almost 3 weeks when I did a reverse rollover in 2020.

It's impossible to predict how the market may go while you're out. But if you're really concerned about this, waiting may be a good option.

If I knew this, I'd quit my job and become a VIX trader

You don't have to have supernatural abilities to know if the market is more or less stable than other times. 2022 so far is obviously not. If you're really concerned about market fluctuations in the 1-3 week range, then might make sense to wait until things seem more stable.

[Gecko10x]

I just went through this and was worried like you are. In the end, I just bit the bullet and waited it out. I did pay a little to have them overnight the check instead of snail mail and I ended up out of the market for about 10 days. Market went up & down, up & down while I was out and I think I bought back in at just about the same place... and I've lost almost $50k since then. lol

You could probably do what you're suggesting... in the end it'll either help or hurt, but you have no idea which!

[nisiprius]

Is there some reason you can't do a transfer in kind? They are perfect for a situation like this.

...One way or another, the $700k will be out of the market for order of a week+ while we liquidate and do the rollover... psychologically I'd hate it if for some reason the stock market soared while the money is being rolled over...

I don't think anybody in the thread has yet mentioned the possibility that the stock market could decline during the two weeks the rollover is in progress.

Even during the bull market of 1/1/2010 through 12/31/2021, VTI had a negative return in 115 out of 394 consecutive 14-calendar-day periods.

[Gecko10x]

Is there some reason you can't do a transfer in kind? They are perfect for a situation like this.

From what I understand, 401k rollovers can only be done by paper check* (though I have no idea why).... at least to an IRA; I suppose it may be possible to do direct for 401k -> 401k, which is what it sounds like the OP is doing.

* edit: when changing custodians. Honestly, I have no idea if this is an actual rule or law, but it certainly seems to be the de-facto stance of the custodians.

[MrJedi]

I've done a Fidelity 401k to Fidelity IRA in kind. The 401k had FSKAX which is available in a retail IRA account. I did not need a check for this and I was able to do it online through the NetBenefits site. I've needed checks when transferring to a different custodian though, even as direct rollover.

If your 401k is invested in funds that are not available in IRA, like institutional class funds or CITs, then it will need to be liquidated l. But when you go from Fidelity 401k to Fidelity IRA, it happens within a day, so you can get reinvested very quickly.