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Please stay away from leverage equity index funds. https://capitalallocatorspodcast.com/wp-content/uploads/2017/03/The%20Surprising%20Cost%20of%20Volatility.pd

Please stay away from leverage equity index funds. https://capitalallocatorspodcast.com/wp-content/uploads/2017/03/The%20Surprising%20Cost%20of%20Volatility.pdf https://capitalallocatorspodcast.com/wp-content/uploads/2017... Edit: For more clarity - risk parity can make sense, but I don't think you ever need to use leverage on your equities to get risk parity. The fundamental insight of risk parity investing is that at commonly recommended ratios (50/50, 60/40) the risk (variance) from equities totally dominates the risk from bonds. So the risk parity advice is usually something with a much higher bond mix, but the entire portfolio is leveraged. But DO NOT use levered ETFs that recognize, say, 3x the DAILY movement of the S&P to do this. They don't do what you think. Read that link, or compute the following two scenarios: 1) Market goes up 1.1% on odd days, down 1% on even days. That yields about 9% (200 trading days). But a 3x daily etf product would only get you about 22%, not 27%. 2) Market foes up 1% on odd days, down 1.1% on even. That, sadly, means you lose about 11% on the year. If you use a 3x DAILY etf product, you lose around 75%.

deleted 6y ago
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arcticbull 6y ago
Please read the write-up before replying with blanket statements that aren't relevant in this case :) That issue is addressed in the bogleheads post explicitly ("How much does the leverage cost?" and "Don't you know that leveraged ETFs are only intended to be held for one day?"), basically the ETFs are risk parity adjusted, and the volatility in the ETFs actually what generates the returns. The strategy makes money from volatility, and the 3X leverage is used to add volatility in, exaggerating the returns. I think you might find the post interesting because it seems like you are interested in investing. What you're saying is again explicitly addressed there, and factored into the calculation. They work an example of that kind of decay, and how it's mitigated. Specifically, it doesn't matter that you have volatility decay in one of the ETFs because they're uncorrelated, and when one goes up the other goes down, canceling out the effect. Your blanket statement does not apply to this specific strategy. It's not wrong in general, but it's not relevant here. If you don't want to read the bogleheads write-up it's also addressed on Seeking Alpha [1]. > "That, sadly, means you lose about 11% on the year." Not if, as you see in the write-up, you pair it with an uncorrelated 3X leveraged asset and rebalance periodically. The post includes a backtest to 1987. [1] https://seekingalpha.com/article/4308489-why-leveraged-etfs-might-be-perfect-for-achieving-retirement https://seekingalpha.com/article/4308489-why-leveraged-etfs-...
- BlackJack 6y ago
  I like the strategy and employ it on a portion of my 401k. I think you need to do it in a tax-advantaged account, otherwise rebalancing + short term gains will eat away your profits. Also, that strategy fails in a rising interest rates environment like in the 50s and 60s (not sure of exact years). Fed has indicated keeping rates low for the next two years, but if they start hiking rates after, I think the strategy would underperform.
  - arcticbull 6y ago
    You are probably better off doing this in a tax advantaged account, or if you have a large lump sum you want to invest you can do the rebalancing by adding money over time instead of selling the winner and redistributing it to the loser. The strategy would fail if both interest rates went up and equities went down or stayed flat. While the potential exists for an underperform condition there in a couple of years I personally suspect the fed won’t raise rates unless equities are performing spectacularly. I’m quite skeptical if their 2 year time frame, even to say we may be looking at the new normal.
- blacksqr 6y ago
  I've been using 3x ETFs for the past few years to pursue a Permanent Portfolio style strategy in one account, and an All Weather strategy in another, rebalance annually, and both have been doing well. Low net volatility, high returns. Backtesting of the strategy shows total returns just under 3x the return of the unleveraged portfolios, just what I expect given the leverage costs. I expect both strategies to be both market-agnostic and age-agnostic. About as close to fire and forget as you can get.
  - kristopolous 6y ago
    The right advice is "don't use a leveraged fund unless you want to be involved and look at the market every day" I've made good money on them as well, but I shuffle money in and out frequently. It's not a good strategy unless you really want to study things.

deleted 6y ago

[deleted]

arcticbull 6y ago

Please read the write-up before replying with blanket statements that aren't relevant in this case :) That issue is addressed in the bogleheads post explicitly ("How much does the leverage cost?" and "Don't you know that leveraged ETFs are only intended to be held for one day?"), basically the ETFs are risk parity adjusted, and the volatility in the ETFs actually what generates the returns. The strategy makes money from volatility, and the 3X leverage is used to add volatility in, exaggerating the returns. I think you might find the post interesting because it seems like you are interested in investing. What you're saying is again explicitly addressed there, and factored into the calculation. They work an example of that kind of decay, and how it's mitigated. Specifically, it doesn't matter that you have volatility decay in one of the ETFs because they're uncorrelated, and when one goes up the other goes down, canceling out the effect. Your blanket statement does not apply to this specific strategy. It's not wrong in general, but it's not relevant here. If you don't want to read the bogleheads write-up it's also addressed on Seeking Alpha [1]. > "That, sadly, means you lose about 11% on the year." Not if, as you see in the write-up, you pair it with an uncorrelated 3X leveraged asset and rebalance periodically. The post includes a backtest to 1987. [1] https://seekingalpha.com/article/4308489-why-leveraged-etfs-might-be-perfect-for-achieving-retirement https://seekingalpha.com/article/4308489-why-leveraged-etfs-...

BlackJack 6y ago
I like the strategy and employ it on a portion of my 401k. I think you need to do it in a tax-advantaged account, otherwise rebalancing + short term gains will eat away your profits. Also, that strategy fails in a rising interest rates environment like in the 50s and 60s (not sure of exact years). Fed has indicated keeping rates low for the next two years, but if they start hiking rates after, I think the strategy would underperform.
- arcticbull 6y ago
  You are probably better off doing this in a tax advantaged account, or if you have a large lump sum you want to invest you can do the rebalancing by adding money over time instead of selling the winner and redistributing it to the loser. The strategy would fail if both interest rates went up and equities went down or stayed flat. While the potential exists for an underperform condition there in a couple of years I personally suspect the fed won’t raise rates unless equities are performing spectacularly. I’m quite skeptical if their 2 year time frame, even to say we may be looking at the new normal.
blacksqr 6y ago
I've been using 3x ETFs for the past few years to pursue a Permanent Portfolio style strategy in one account, and an All Weather strategy in another, rebalance annually, and both have been doing well. Low net volatility, high returns. Backtesting of the strategy shows total returns just under 3x the return of the unleveraged portfolios, just what I expect given the leverage costs. I expect both strategies to be both market-agnostic and age-agnostic. About as close to fire and forget as you can get.
- kristopolous 6y ago
  The right advice is "don't use a leveraged fund unless you want to be involved and look at the market every day" I've made good money on them as well, but I shuffle money in and out frequently. It's not a good strategy unless you really want to study things.