Ask HN: 3x leveraged ETFs – The winning long-term strategy?
10 comments
It's a great idea as long as the long rates keep falling.
Also, huge volatility spikes can kill you, those are covert short vol instruments (i.e. they have a non-zero probability of 100% capital loss, due to the embedded leverage). This is not theoretical, 2020 saw liquidations of leveraged oil futures ETFs and ETNs that, had they not been liquidated at the most inopportune moment, would be perfectly fine.
Backtest on the standard cocktail of leveraged US Treasuries and leveraged sp500 before 1980 to see what do I mean, exactly.
Also, huge volatility spikes can kill you, those are covert short vol instruments (i.e. they have a non-zero probability of 100% capital loss, due to the embedded leverage). This is not theoretical, 2020 saw liquidations of leveraged oil futures ETFs and ETNs that, had they not been liquidated at the most inopportune moment, would be perfectly fine.
Backtest on the standard cocktail of leveraged US Treasuries and leveraged sp500 before 1980 to see what do I mean, exactly.
For deep dive into quantitative analysis of leveraged portfolios, this analysis on Bogleheads Blog by forum member Siamond is very insightful:
https://www.bogleheads.org/blog/2020/01/31/leveraged-portfol...
I know a 3x leveraged fund does not behave as idealized, when you really cash out you won't really get 3x the rate of return.
It would be insane to put 100% of your portfolio in such a fund, it is more like it to allocate 30% of your portfolio to that, and the rest to something safe or at nest decorrelated from the stock market, say 30% in Lending Club, 15% in gold, 10% in bank CD, etc...
If the market has an awful day a triple-levered fund can take a much worse hit than expected, particularly if the market "sizes up" like it did for Gamestop. I'd think a levered fund for the S&P500 or NASDAQ work be pretty safe but anything more granular is getting risky.
Note also that if the market goes against you in the short term the ETF may go out of business and hand you the cash at the worst possible time which you might reinvest properly but you might not.
It is really fun to invest in a dangerous ETF or ETN with some "Mad Money" (like it is fun to bet on the horses) but if you are interested in that kind of "leveraging" you should understand Stock Options enough to understand how you can accomplish the same thing with as the 3x ETF with a program of trading of SP&500 options -- in that case you may be able to "keep on keeping on" through the dip and make huge profits in the end. Or maybe you give up out of despair or are forced to give up by your creditors.
Great hedgie and social-democrat economist J. M. Keanes said "the market can remain irrational for longer than you can remain solvent" and you can face the squeeze yourself with options, short selling and similar tools.
It would be insane to put 100% of your portfolio in such a fund, it is more like it to allocate 30% of your portfolio to that, and the rest to something safe or at nest decorrelated from the stock market, say 30% in Lending Club, 15% in gold, 10% in bank CD, etc...
If the market has an awful day a triple-levered fund can take a much worse hit than expected, particularly if the market "sizes up" like it did for Gamestop. I'd think a levered fund for the S&P500 or NASDAQ work be pretty safe but anything more granular is getting risky.
Note also that if the market goes against you in the short term the ETF may go out of business and hand you the cash at the worst possible time which you might reinvest properly but you might not.
It is really fun to invest in a dangerous ETF or ETN with some "Mad Money" (like it is fun to bet on the horses) but if you are interested in that kind of "leveraging" you should understand Stock Options enough to understand how you can accomplish the same thing with as the 3x ETF with a program of trading of SP&500 options -- in that case you may be able to "keep on keeping on" through the dip and make huge profits in the end. Or maybe you give up out of despair or are forced to give up by your creditors.
Great hedgie and social-democrat economist J. M. Keanes said "the market can remain irrational for longer than you can remain solvent" and you can face the squeeze yourself with options, short selling and similar tools.
I think it's generally understood that 3x leveraged ETFs are terrible for long-term.
Losses are disproportional to gains and with rebalancing and fees, they're a long-term loser.
Losses are disproportional to gains and with rebalancing and fees, they're a long-term loser.
Yes but according to the author’s math that’s a myth. http://ddnum.com/articles/leveragedETFs.php
Depends. If you're 3x leveraging tech during a dotcom-bubble-like correction you're basically screwed. You'll likely lose 99% of your investment.
They also tend to underperform in volatile markets that trend sideways when you factor in fees and slippage.
Really they only do well in market environments similar to that of the last decade which is probably why so many people now believe leveraged ETFs to be an obvious strategy.
If you find a good leveraged ETF it might work out over the short-term. It's honestly not the worst investment you can make, especially if you're young and willing to lose 90%+ in a worst case scenario. But it's not a silver bullet – and you shouldn't expect to find one in a market as efficient as the US stock market.
Just remember even if you make 500% returns over 10 years if you then lose 90% of that you're still down on the decade. Just last year TQQQ lost 70% and only recovered because of the strong tech recovery – but you can see how this strategy could backfire in less ideal markets.
They also tend to underperform in volatile markets that trend sideways when you factor in fees and slippage.
Really they only do well in market environments similar to that of the last decade which is probably why so many people now believe leveraged ETFs to be an obvious strategy.
If you find a good leveraged ETF it might work out over the short-term. It's honestly not the worst investment you can make, especially if you're young and willing to lose 90%+ in a worst case scenario. But it's not a silver bullet – and you shouldn't expect to find one in a market as efficient as the US stock market.
Just remember even if you make 500% returns over 10 years if you then lose 90% of that you're still down on the decade. Just last year TQQQ lost 70% and only recovered because of the strong tech recovery – but you can see how this strategy could backfire in less ideal markets.
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Nonsense.
Any strategy that is so easily communicated is certainly already being countered by a hedge fund quant somewhere. And then counter-countered by another quant. And it's quants all the way down.
IMHO the real winning strategy is a Buffet-esque deep understanding of value and fundamentals. And then that really only works in the long run.
You wanna try to outsmart legions of three generations of greedy mathematical wunderkinds high on caffeine and cocaine? Good luck.
Any strategy that is so easily communicated is certainly already being countered by a hedge fund quant somewhere. And then counter-countered by another quant. And it's quants all the way down.
IMHO the real winning strategy is a Buffet-esque deep understanding of value and fundamentals. And then that really only works in the long run.
You wanna try to outsmart legions of three generations of greedy mathematical wunderkinds high on caffeine and cocaine? Good luck.
That's like saying that investing in the S&P 500 is nonsense, because if it were so easy then everybody would be doing that, and nobody would buy bonds.
The thing is, that there is a risk/reward relationship for everything in investing. And according to this article, the return you are getting on a 3x leveraged ETF are about 20% annually (2x normal stock returns) while the risk/volatility is about 3x. So, there is no free lunch. You are only getting higher rewards for taking on much higher volatility.
The thing is, that there is a risk/reward relationship for everything in investing. And according to this article, the return you are getting on a 3x leveraged ETF are about 20% annually (2x normal stock returns) while the risk/volatility is about 3x. So, there is no free lunch. You are only getting higher rewards for taking on much higher volatility.
3x leveraged ETFs get rebalanced every day. Read up on that and why your gains decay over time. Anyway, I do keep an eye on a few 3x ETFs when I think I’m capable of holding it for a short block of time.
What do you think?