Any cons of putting all your long term investments in a x3 S&P fund?
This is strictly for long-term investments, I have a separate rainy day fund. What are the cons of putting your money in an x3 fund? The way I look at it while highly volatile, it has exposure to the whole market, and as long as my time horizon is decades I'll make far more money over time. An argument is obviously if the S&P is down. However, if it's down over the next 40 years aren't we all fucked anyway?
Wondering the same exact thing here.
The S&P 500 dropped about 34% peak to trough during covid.. can someone do the math and tell me what 34x3 is?
The 3x S&P 500 fell 75% last March, though they are up a huge amount now
The 3x levered funds rebalance daily, so unless it fell 34% in one day, you wouldn't be wiped out, right?
Vol decay brother.
Don't waste your time on levered ETFs. It's not gaining leverage in the same way that you would with a margin trading strategy where you try to minimize your equity position in relation to overall exposure - levered ETFs just amplify price movements. The leverage also "resets" every day so it is drastically more difficult to recover from price dips.
For example, during the start of COVID oil ETFs were moving something like 30%+ in a single trading day which was causing index/D1 traders to freak tf out. Essentially if the underlying securities on a 3x levered ETF (which is made of swaps and index options) move more than -33% in a single session, the ETF "defaults". The value can deteriorate so aggressively when things go sour or if there is a prolonged period of negative price changes.
Say if SPY (underlying) and SPXL (3x levered SPY) are both trading at 100. SPY drops 10% in a day. Now SPY is at 90 and SPXL is at 70. The next day it drops another 10% - now you have SPY at 81 and SPXL at 49. On the third day SPY jumps 50%. Now you have SPY at 121.5 and SPXL at 73.5. This implies a 26.5% net loss in SPXL over 3 days, but a 21.5% gain in SPY. Now think about it as if you were 3x levered on margin with SPY in the same timeframe. Your original equity (33.33) would have appreciated to 54.83 (33.33 + 21.5) to net a pretty solid 64.5% return. Obviously this doesn’t account for margin costs or margin calls (which you would undoubtedly get), but this illustrates the principle.
If you want to lever up, open up an interactive brokers account and start trading on margin. A much more sensible way to do it IMO
Correct answer here^
Good explanation. Levered ETFs should really only be used to hedge
Great post. This is the kind of stuff we need here at WSO.
Ok this makes sense, thanks for the help
Most capital efficient way is to just get the leverage with SPX futures
Do you trade SPX/NASDAQ futures yourself? If so, what platform do you use, and how much leverage can you get on e-mini contracts? I have been looking to try out this strategy for a while but I am curious how it works with bank trading policies/restrictions.
Thank you, I've dabbled in levered ETFs in the past but this angle didn't occur to me.
"There is nothing magic about the leverage value 1. There is no mathematical reason for returns to suddenly level at that leverage... What the myth propagators have forgotten is that there are two factors that decide leveraged ETF returns: benchmark returns and benchmark volatility. If the benchmark has a positive return then leveraged exposure to it is good and compensates for volatility drag. Since the return is a multiple of leverage and the drag a multiple of the leverage squared then eventually the drag overwhelms the extra return obtained through leverage. So there is a limit to the amount of leverage that can be used."
A leveraged ETF at ~2x leverage might be optimal for maximising returns in strong bull markets. The positive return on capital more than outweighs the effect of volatility drag. The historical data speaks for itself:
I am sure the numbers for leveraged ETFs on US indexes look even better if we extend the data range to 2021, given the outstanding bull run that SPY and QQQ have had since the end of the financial crisis.
Also unless you want to blow up Archegos-style, please think carefully before opening 2x or 3x leveraged positions for long-term hold using margin on interactive brokers. Getting margin called is a way bigger risk and has much bigger downside than holding a leveraged ETF through a drawdown. In this sense leveraged ETFs are superior to trading with margin since there is no chance of getting a margin call.
Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664823
I think you fudged your math there with the example.
SPY @ $100 SPXL @ $100
-10% -30%
= $90 = $70
-10% -30%
= $81 = $49
+50% +150%
= $121.50 = $122.50 (I think you multiplied by 1.5 and forgot to add 1, should be 2.5)
Perhaps what you're trying to illustrate is:
SPY @ 100 SPXL @ 100
-10% -30%
= $90 = $70
+10% +30%
= $99 = $91
A UPRO/TMF strategy may suit someone interested in this.
People can argue about 'they decay' 'margin is better' etc but the historical returns speak for themselves. Nasdaq 3x is now up 100% since the precovid peak. That's after a fall of nearly 75%.
The bigger danger is the mental side. Can you personally stomach the volatility if it is a sizable part of your portfolio? I've been using leveraged etfs and even though logically I should be increasing my exposure for the higher returns, I can't stomach it. It's too scary. Maybe you can, but you won't know until you see your account plummeting with the leverage. And if you miss even the first couple of days of the rebound... Congrats you already lost that first 40% recovery bounce in the leveraged etf. That's the real danger. Not the leverage itself, but the fact that you will pussy out and won't hold or won't buy the dip. And it will have a mental toll seeing your account -15% per day.
You'll lose your money 3x as fast when the market bleeds for the GME margin call. Wait till you see that to buy up a bunch of a leveraged ETF.
Leverage resets every day. These funds don't work like you think and are not going to win in the long term
Can someone elaborate a bit on the concept of resetting leverage and the implications?
I edited my comment above. Take a look
Very helpful. Thank you.
Main con will be deciding which Private Jet (PJ) to buy when that investment is inevitably worth hundreds of millions down the line
The only con.. is that you officially become autist
The optimal leverage given the last 2 decades of S&P behavior is around 2, not 3.
When I was analyst I had the same idea as you, but the idea never seemed to work out.
Admittedly, I’m a banker and not a trader, so I can’t explain eloquently why holding levered etfs over a long period of time doesn’t work, but just google time decay for these products.
I believe they are best used over short time frames.
I get the arguments against due to time decay. But also for the “it’s not the right product for the long term,” I mean look at TQQQ’s chart. I think a sensible approach might be dedicating a small amount that you aren’t afraid to lose to this approach: put a few thousand in to start, then slowly dollar cost a small amount in. If it tanks, exploit the low price and add on. If it rips, trim the position gradually until you recoup your initial investment (or don’t and let it ride)
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