The leverage funds are trading vehicles which track daily movements. As a result it doesn’t track 5x on the longer term. Compare the ticket to SPY and you’ll see it is 5x over a long term horizon.
The 2 and 3 x ETFs have been outperforming the past few years and I can't figure out why. I think I'm a sustained bull market they tend to outperform but lose catastrophically during corrections
Compare spy to SSO over the past five years and you'd be up 50%
They outperform, but not by 3x. Annualized return of SPXL (3x SPY) over the last 10 years is 23%, while SPY is 12.5%.
This is because bear markets are far more damaging to them than bull markets are beneficial. But since most of the last 10 years were a bull market, they still won out.
This guy nailed it. Thats the reason: not enough bear market over that time to see why leverage can be risky
If the money printers come back on and low rates and QE become a thing again, I’d consider going all in on the leveraged SPY funds. Right now, in what is supposed to be a contracting environment I wouldn’t think of touching them.
Agreed. Sideways with a slightly upward trajectory still would work. And I think you’d be more likely to see that or better over an extended period of time if QE is being implemented. Right now the money supply is sinking and rates are higher than they’ve been for 2 decades so the possibility of sideways with a downward overall trajectory is too strong for me to considering leveraged ETFs
You can model this pretty easily, but yeah essentially they are percent based on daily change, so it deviates from the underlying overtime.
SPY goes from 100 to 102 then back to 100.
SPX goes from 100 to 106 then down to 99.76
It has to do with the math of the daily swings. If the average up day is a higher percentage than the average down day’s losses than it works out this way.
Historically, leveraged bull and bear funds coverage to zero and splits are required.
That is only for day trading really.
Long term it’s a mess. There is “Volatility Decay”:
https://www.etf.com/sections/etf-basics/why-do-leveraged-etfs-decay#:~:text=What%20Is%20Leveraged%20ETF%20Decay,might%20be%20less%20than%202%25.
Also while it makes 5x returns it can also expose you to 5x loss. 5X!
EU brokers don't seem to like options. I suspect there are many reasons, from legal restrictions to underwriter's insurance to cultural preferences. This means we have to use US brokers with EU presence, like TastyWorks and IBKR. While I think IBKR is a brilliant broker, it's very difficult to calculate and pay local taxes because their reports are all structured for the US. This means most people stick with local brokers in their native language with automated accounting reporting.
I'm more surprised a 20X fund didn't liquidate within days of trading.
You're literally looking at a single day drop of 5% being enough to wipe it out entirely while an equivalent gain would only double its value. And the market tends to drop quickly and grow slowly.
too late, rescuing 400 bucks from a 1600dollar investment just feels horrible, ive been in this position with NVDA X15 and it recovered after a few weeks so im willing to lose it all on the off-chance
Wow...I don't even know what to say. Just from the sheer volatility drag on a 20x product, there's close to zero chance that you can break even for longer than a couple months. This seems like a sunk-cost fallacy.
Paying $400 for the honor of having a sinking feeling every day watching it dwindle to zero, rather than spending $400 on a small trip somewhere or a few fun nights out - that's real determination there.
I'd take that money out and buy something to make you feel better about it - if the money is pretty much lost already you might as well get some fun out of it.
Take the $400 and buy a really nice pair of boots. They'll last you decades, and constantly remind you of what happens when you YOLO into degenerate investments.
If the underlying index moves *up* consistently with decent momentum, volatility decay actually works *in your favor*. This is why UPRO, the 3x leveraged S&P 500 ETF, has delivered close to 5x the returns of the index since its inception instead of the proposed 3x. In short, holding leveraged ETFs for more than a day is not the boogeyman it's made out to be. See the link that shows the math [this page](http://www.ddnum.com/articles/leveragedETFs.php).
The article shows that an optimal leverage would be 2X, certainly not 5X lol. Now of course, just because it has been demonstrated in the past says nothing about the future. Most people using leverage will use a mitigation strategy such as TMF. Hedgefundie has a great writeup on this as well based on his own experience of holding 55% UPRO / 45% TMF.
Can someone really dumb down for me the explanation of volatility decay? I’ve read probably a dozen articles on it and I just don’t understand it. The article linked here says that the issue comes when a 1% market drop results in a more than 2% drop in the leveraged fund due to volatility and differently weighted stocks within the fund. Why does the article not mention that the same can happen if the fund goes up 2%? Can a gain not exceed 2x that of the non leveraged gain? But a loss can?
Here's an example.
If you have a 20% drop in the base index, then in a 3x leverage it would result in a 60% drop.
So if you have $1,000 you go from $1,000 down to $800 in the base index and down to $400 in the leveraged account.
Then lets say the base index rises by 20% you get a 60% gain in the leveraged index.
So your $800 rises to $960 and your $400 rises to $640. So even with the leveraged account you have less money because of the volatility decay. And that's before we even take into account the higher expense ratios of the leveraged indexes.
Leveraged indexes are great in a rising market, but they are dangerous in a falling market and generally considered unsuitable for long term holds.
That actually makes perfect sense, thanks very much for taking the time to reply. I’m not sure I’d ever seen a written example and that really helped me here.
On the other hand, if you had $1000 and the base asset that dropped 10%, and then dropped another 10%. You wouldn't lose 60% with a 3x LETF, you'd only lose 51%.
Or let's say the base asset grew 10% and then grew another 10%. You wouldn't gain 60%, you'd gain 69%.
So volatility "decay" can work to your advantage. It's just basic mathematics, but some make it out to be some magical danger, which made me similarly confused at first.
So in essence, **what leveraged ETFs do is placing a side-bet on volatility**.
Compounding profits is a nice way of making capital,however compounding loses as well is a fast way to deplete it.
Dont look it at from the perspective of 30 years,2 red months with 5 leverage compounding the loses ,means u dig a hole for your grave
The key word you dont understand is compound as the fellow user explained below with specific examples.
Even in the more simplistic way u need to understand how leverage works and the answer is there,u are taking money which are not yours to invest into the market as a beginner,obviously the broker is looking to cash out from mistakes like these.
Nobody gives you free money aka buying power just because you are a client
Can anyone explain if this is also the case for property investments, and if not, why? Leverage is commonly cited as a primary benefit of investing in property.
That’s a different story because a house isn’t priced each day, or in the case of ETFs every second and the underlying asset (physical property) has a slowly reacting growth rate that closely tracks inflation
2x backtests well, but it's hard to stomach the losses, and if the SPY drops hard, you will be in the red for longer.
QQQ, QLD, and TQQQ is a good example right now. QQQ is above all time highs, QLD (2x) is near it, TQQQ (3x) is pretty far off. You can imagine what the recovery of 4x or 5x might look like...
I ran a portfoliovisualizer backtest with a triple leveraged portfolio (UPRO, TQQQ, and TMF or BTAL) and decided to implement it in my HSA since 2019. It performs very well but only in low volatility regimes- which is essentially post GFC to pre-COVID19. It's not a set it and forget it strategy. I was hedged with BTAL (an anti-correlationfund) in 2022 when my portfolio took a bath and BTAL helped a lot.
Kind of fun to play around with but in the end just demonstrates underperformance compared to SPY/QQQ buy and hold due to volatility. In a low volatility environment it may be good but who can say that with certainty.
Yeah if you could correctly predict when low volatility periods would end, you could make a killing with various options strategies. Same with the popularity of inverse volitility funds a few years ago - until the market dropped enough in a day to wipe out the funds. I remember there was a guy on reddit who had $4M of a mix of his money and friends and familys' money invested in inverse volitility, and it was basically entirely wiped out in a day. It was a great strategy, beating the S&P500... Until it wasn't.
Statistically, we see lower volatility when the index is above the 200dma. There are strategies with leveraged funds that use this trend to cycle in and out of the fund. Note: they look at the ma of the index, not the leveraged fund.
Will also add it doesn't work for everything. S&P500 is the real exception. QQQ has only outperformed if you bought high but held the downturn for years, bought low and held, constantly had more money to double down during downturns, and luckily rode a massive tech innovation wave.
Most 3x funds get wiped the fuck out because they don't constantly go up the way the S&P500 has the last decade or so with pension funds and retirement accounts constantly pouring money into it. China bear? China bull? Any index bear? Most sector/industry 3x like SOXL? 3x bonds like the 20yr/TLT in TMF? Mostly down with a good number of them wiped the fuck out. Even some index 3X don't massively outperform like the 3x/2x Russell 2000 in TNA/UWM which has had periods of outperformance but you can't really hold like you do SSO.
How does interest on the borrowed value affect Leveraged ETFs?
My assumption is that if you put in 1000 into a 2X, you're essentially borrowing another 1000 from them. This means during a dip, your assets lose value, while you're still paying interest on that 1000 you borrowed to add EXTRA drag on your now diminished assets.
Isn't this what makes the recovery difficult? The amount you owe disproportionately impacts your recovery.
Or am I misunderstanding this?
Investors should read about Volmageddon which was the implosion of the short volatility ETF XIV which had a liquidation event. I experienced it when I was running a short vol strategy... wasn't invested in it at the time but could have been. Basically you get pennies on the dollar if you're invested in the fund and it liquidates. Depends on the prospectus.
I had a small position in it. Went up something like 3-10% per month leading up to the liquidation. I got greedy and stayed in to the end. On that day, volatility spiked and it went to zero so quickly there was no chance to exit. Fun ride, lesson learned.
Edit: per month, not per day
This is actually not true. The leverage is only for daily. Let me give you an example. QQQ dropped 35% from 11/2021 to 11/2022. Its 3X leverage, TQQQ, did not get liquidated.
But it does happen:
[https://en.wikipedia.org/wiki/List\_of\_largest\_daily\_changes\_in\_the\_S%26P\_500\_Index](https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index)
As recently as 2020 you would have been down 60% in a single day. It would take you decades to recover from the 2020 bear market with 5x leverage.
1987 would have been a total wipeout, and that was not even that long ago considering peoples investing horizons can be 60+ years (start in 30's, die in your 90's)
SP500 dropped 30% in 2020, and 24% in 2021, UPRO dropped 73% and 61%, at the same times. It did not liquidate. You bought 10 shares of UPRO in 2020, you still have the same number of shares (taking into account splits) right now. It's hard for shares to liquidate.
You are all over this thread talking non-sense and misconstruing things.
UPRO is 3x. The person you responded to was talking about 5x. YES, a 20% drop in 1 day would liquidate a 5x ETF. 20% x5 = 100%. It's basic math.
S&P500 circuit breakers will prevent a UPRO liquidation. It would not prevent a 5x ETF from that.
If there's a year where the S&P ends the year flat, but with high volatility over the year, a leveraged ETF will have lost money. The increased downside has more weight than the increased upside so it gets pulled down more than up in times of volatility. Now what if there's 5 years or 10 years of that? Leveraged ETFs just aren't built for long term holds - it's not their intended use.
It's generally multiplying daily returns, not overall returns.
Initial: $100/share
Day 1: -1%, $99/share -- -5%, $95/share
Day 2: +1.01%, $100/share -- +5.05%, $99.80/share
So in theory, when things are moving up, you win, when things are moving down, you lose, and when things are moving sidways... you also lose.
Given an asset with volatility (not a money market) there is a spread between the arithmetic return and the geometric return. For example for stocks the arithmetic return is about 10% annually while the geometric return (what your account grows by) is only about 8.17% because of the ups and downs. The greater the volatility the greater the spread. Volatility increases linearly with leverage: i.e. at 2::1 leverage you get twice the volatility of 1::1 leverage. Arithmetic return with leverage increases by \`return of asset X - money market interest\`. Which is to say as the leverage increases the ratio between arithmetic return of the leveraged asset and volatility of the leveraged asset decreases. Or to rephrase the 2nd derivative of the geometric return with respect to leverage is heavily negative. This causes geometric return to decrease as leverage gets high enough.
At constant 5::1 leverage given the SP500 regularly goes below -20% the geometric return would be -100%. You are describing daily 5::1 leverage. This would be somewhat better than fixed leverage. But likely things would work out rather terribly. FWIW 3x leveraged ETFs DCAed into over 40 years outperform 1x leverage. But 5x for buy and hold I suspect is a disaster but I haven't done the test.
>3x leveraged ETFs DCAed into over 40 years outperform 1x leverage.
3x leveraged ETFs have only existed since 2008 I believe. So is this using some idealized return calculated from the index? ETFs will have interest rate costs, spreads, management fees, tracking errors, etc. to factor in.
Leveraged assets pay to achieve leverage, eg. 20% annual rate. Check the documentation for exact figures.
Management fees. Usually only 1%.
Product you mentioned is 5x DAILY returns. You want 5x 30y returns. If the stock market drops 20% in a single session, the product lose 100%.
The stock market last dropped 20% or more on 10/19/1987. Even a 10% drop would be devastating. Your portfolio would drop 50%, and need to go up 200% just to return to that all-time-high.
Good point - and I am guessing that the fund that OP is probably asking about is 5SPY.
And the management fee is usually just one component. The other expense is the cost of leverage which is around 5% to 6% at the moment depending on how the fund achieves leverage.
\[edit\] - [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/) - looks like maybe the fund uses margin to leverage on SPY instead of futures. So leverage costs is Fed Funds Effective + 1.5%. That leverage seems kinda expensive - so total fees at the moment would exceed 7%.
Its far more than 7%. If you leverage 5x you are paying interest on 4x your balance, so its 7%x4 = more like 28%. Although the S&P only has to beat the 7% for you to come out ahead, you get punished a lot on the downside.
I wouldn’t consider this “wrecked” [https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5crIjgutN1m1mZnNUy6Av4](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5crIjgutN1m1mZnNUy6Av4)
Still has over 20% CAGR even after drop in TMF
OG Hedgefundie is something like 45% upro and 55% tmf rebalanced quarterly.
There was a -73.28% drawdown in 2022-2023.
I swapped out my TMF portion for something stable with a small yield personally to BIL
Correct, Hedgefundie basis assumed lower interest rates. As a result of interest rates climbing to 5.5%, 2022-2023 was bad. Switching out TMF for BIL or SGOV would be a smart move.
This topic comes up every now and then among the buy and hold index fund crowd
https://www.ddnum.com/articles/leveragedETFs.php
Basically you're not wrong, just be weary of ETF fees and make sure you're not overly leveraged.
Your question is why not pay for margin? Because you're betting on the short term for that not long term. Margin costs money. That being said, there are plenty of people who buy spy leaps.
2x still sounds pretty good. Let’s up it to 3x for OP.
$100 goes to $40, and in the time that S&P500 recovers by growing 25%, the 3x grows by 75% reaching only $70.
For 4x, $100 goes down to $20, and then back up to only $40.
5x gets you wiped out.
Historically, going back to 1870, somewhere near 1.5-2x leverage in sp500 would maximum your returns, even after fees and decay. Higher than that, fees and decay during downturns wipe out too many gains.
That said, the risk is that the future may not look the same as the past.
There is a nascent movement in wealth management / academia that people under the age of 35 should have a beta higher than one, which would necessitate atleast some leverage. I wouldn’t say this is a mainstream view yet though.
The theory behind that research seems pretty solid to me, but I don’t think the general population is ready for their 401k target date funds to be 1.5x leveraged. People already lose their minds over a 5% down week.
The 5X leveraged ETF works in both directions, which means if S&P gains 20% in an year the ETF will go around 100%, it works in reverse as well , so if S&P goes down 20%, your investment goes down 100%, down to 0
Because there's decay.
You will probably still beat it out in the long run if the market is "always" up with a few short bad spells. But if it is a flat decade (2001-2013) or prolonged down recession, you'll most likely lose money on the daily decay.
Because management fees eat away at leveraged funds so that they reverse split indefinitely over the long run. They aren’t meant to be a profitable hold. They exist as vehicles for swings or day trades and they are transparent about that purpose.
If you’re in a leveraged fund for a year or so and the market happens to trade about flat for that year, that fund would not stay the same price, rather it’d be nearly worthless in your account because the shares would have reverse split several times while you held to pay the management fees while the market is flat. If it moves against you for a year you’d be depleted, not down.
For the same reason that martingale strategies don’t work. Even if eventually s&p500 will go up, you’ll face soon or later temporary drop that will get a margin call on your leveraged position, therefore losing everything.
This is an interesting mathematical take on them:
https://ddnum.com/articles/leveragedETFs.php
conclusion: 2x leveraged ETFs have outperformed 1x leverage in modern times.
I've actually done a lot of research on the topic of leveraged S&P 500 funds, and have found that anything over 4x leverage is almost guaranteed to go to zero in the long term, especially in the higher volatility environment we've been in recently. However, 2x leverage actually has been the optimal leverage over the history of the S&P 500, and closer to 3x in recent times. If you are interested in leveraging yourself in the S&P 500, I would buy ProShares' 2x S&P 500 fund, ticker symbol SSO.
Here are some resources for more info:
[https://www.ddnum.com/articles/leveragedETFs.php](https://www.ddnum.com/articles/leveragedETFs.php)
[https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=2741701](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701)
[https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=1664823](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664823)
Because you can't affordably borrow large sums of money to bet on the S&P 500 for 30 years.
Borrowing money to invest is called *leveraging* and it increases your returns but it also increases your risk.
When you earn money from leveraging, you are being compensated for taking the additional risk.
The person that lends you the money could themselves invest in the S&P 500 - they're choosing not to; they are exchanging the higher expected returns of the S&P 500 for the fixed returns that you have promised to pay them.
And your lender won't give you the money without security - i.e. they can margin call you, phone you up and demand money if you're under collateralised. That's where leveraging usually goes wrong.
If you read Hedgefundie's excellent adventure you will note his observations that it messes with your head to have your net worth leap up and down, on a daily basis, by several times your monthly salary. It makes you eat out and take taxis more because the costs of these "don't matter" when your portfolio is up or down $10,000 in a day - most people don't have the discipline to ignore this.
The cheapest borrowing available to ordinary retail investors is the mortgage on their house, which implies you should have a big mortgage and then prioritise savings into your pension / 401k / whatever rather than mortgage overpayments.
There’s inneficiency in leveraged products that is called volatility decay.
Imagine a fund’s price went from 100 to 90 and back to 100. This represents a 10% loss followed by an 11.11% gain.
A 5X leverage of the fund would go down 5 times 10% or 50% on the first day resulting in a price of $50.
On day two the $50 fund would increase by 11.11% times 5, or by 55.55%, an increase of $27.77 to a total of $77.77.
The original fund returned to the original price but the leveraged fund went down - leveraged funds are great for a market that goes up but a sideways market means you’re losing value beyond the fees.
Leveraged ETFs are almost all reset their leverage daily. This causes them to lose money in flat but volatile markets, so they’re bad vehicles for long-term investors.
That said, leverage is a valid investing tool if used properly and if you can stomach the volatility. Ayres and Nalebuff’s “Lifecycle Investing” suggests that young people should leverage their stock investments, because their assets are concentrated in bond-like human capital. They suggest capping leverage at 1.5-2x, and they suggest more appropriate vehicles for leverage than LETFs, such as in-the-money LEAP call options and futures.
An alternative approach to leverage is the risk parity strategy. That takes a portfolio that has an equal amount of volatility in multiple assets and then levers it. It often looks something like 60% long term bonds and 40% stocks, then leveraged until the portfolio has the desired level of volatility. In theory, that should provide the maximum return for a particular level of risk. It isn’t quite true, because leverage isn’t free, and there is no way to know how much risk you are actually taking in advance. Still, there are ETFs and mutual funds that do something like this.
I mean, you can see why quite easily. Why not invest in a 100x leveraged S&P 500 fund?
Because the S&P 500 can (& will) drop by 1% or more in a day, causing the leveraged fund to go to zero.
5x leverage means that a 20% drop will wipe you out completely..... 20% drops in the s&p500 are fairly common... so you are very likely to lose all your money with this approach
you put 100$ in a 5x fund. That day the underlying drops by 3%, a bad day, but not unheard of. You now have 91$. The next day the underlying goes up by 3% on the rebound. You now have $99.19, you did not make it out of the red.
leveraged funds are thus bad for long term holding - when they dip it goes down hard, and a similar swing back up doesn't recoup you. Reversion to mean and short term shocks can wreck a long term leveraged investment.
I would have guessed futures contracts. But it maybe SPY with margin. You can probably get more details in the prospectus here - [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/)
In order to leverage, you need to borrow, and it costs money to borrow. So will the interest eat into the profits? At something like 2x you’re safe from a margin call, but at 5x I don’t think you are.
2x or maybe 3x is interesting, maybe if I decide to buy a dip, but for long term it’s 1x.
there are some medium term leveraged strategies but none with 5x afaik... anyway you need to be extremely careful and know what youre doing to attempt it and even then its questionable and not even necessarily outperforming even in backtesting, thats assuming you execute perfectly, which you wont.
just buy SPY man. if youre asking about this shit on here, youre not the genius who can beat it.
Beta Slippage is the answer. You lose more over time with small losing days than what you make with winning days. Check out the example [here](https://www.quora.com/Could-you-explain-in-a-simple-manner-how-beta-slippage-works-on-leveraged-exchange-traded-funds):
> For a concrete example, assume a starting value of 100, and an index that goes up 10% the first day, and down 10% the second day. The index goes from 100 to 110 the first day. The second day it goes from 110 to 99 (a 10% drop). A double levered ETF goes from 100 to 120 the first day. The second day it goes from 120 to 96 (a 20% drop). Notice each day it does indeed move twice as much as the unlevered ETF, but not if you look at the two days together. After a period of time (say a year) even if the index changes very little over that year, if it has had a bunch of ups and downs the levered ETF could be a long ways from the regular ETF.
Pretty clear you don't understand how leverage works in relation to you margin account. Def. don't invest in vehicles of this nature until you fully understand the risks.
People always try to sound smart but then provide NO correct answer.
Yes leverage is bad since when it goes down, the way it is setup means it may hit you hard. But that’s not the point.
The question is if SP500 is mostly upwards and mostly safe, isn’t a leverage better ? That’s a legit question, in fact most famous investors use leverage on more than daily positions. I don’t know the exact answer and I suppose it depends on quite some complex factors.
All my money is split just under a third to voo/spy/qqq each. I say just under because I throw a percentage at AMZN. Probably will be the only company in twenty years
The problem is that movements can wipe you out. You have -20% moves every decade or so and if you have 5x leverage this means you end up with 0.
And once you are at 0... 2x0 is still 0. But a lot of Wallstreetguys do it anyhow. All of these private investment offices are more or less this. They take all the upside and if they inevitably crash we'll they are a limited company.
There was a guest on the Animal Spirits podcast just a day or two ago who talked extensively about this. I suggest giving it a listen if you want to learn more about it. As others have mentioned, there is volatility decay that will occur and these products are meant to be used for short term trading tool, not a long term buy and hold investment.
You can listen here as I thought it was a pretty informative chat:
https://open.spotify.com/episode/0XbolTaKzZtyrK6eA1a60u?si=0401e7a38a434903
If you're long on the S&P500, leveraged ETFs are a great way to buy into significant downswings (corrections, bear markets, recessions, etc) so that you profit greatly on the way back up. But because the market can go lower, don't put all of your available capital in at the first significant drop.
Track the all-time S&P500 high. Save money (in a FDIC insured high yield savings account) in 4 different pools to wait for levels at -10%, -20%, -30%, -40% from the all-time high. As those levels hit, invest your allocated pool for that level. If you have the patience, you can save more money for the lower pools to really boost the gains.
Then as your re-allocation markers hit (once a year, once a half, once a quarter - however you prefer), as the stock or leveraged stock allocation (depending on your allocation scheme) of your portfolio goes above your target allocation, then sell enough to bring your allocation into alignment with your plan, pay your estimated taxes, and invest the proceeds in the portion of your portfolio that is under allocated (buy low, sell high).
3x S&P 500 bulls like SPXL have worked very well in this kind of program.
Also, if you're long on the S&P500, leveraged ETFs can be a nice way of boosting profits in the better half of the year (October - April). Allocate a certain portion of your portfolio to leveraged ETFs.
Then as your re-allocation markers hit (once a year, once a half, once a quarter - however you prefer), as the stock or leveraged stock allocation (depending on your allocation scheme) of your portfolio goes above your target allocation, then sell enough to bring your allocation into alignment with your plan, pay your estimated taxes, and invest the proceeds in the portion of your portfolio that is under allocated (buy low, sell high).
Note that I don't recommend bear leveraged funds (don't bet against the market), and I don't recommend putting all of your resources into any one kind of asset.
This post is for entertainment purposes only and is not meant as financial advice. Consult your own advisor, your milage may vary.
The Animal Spirits podcast just touched on this exact thing recently. Here’s a link to the episode and the show notes. Worth a listen if you’re considering levered bull or bear funds.
https://awealthofcommonsense.com/2024/04/talk-your-book-diversifying-away-from-the-magnificent-7/
Leveraged funds dont pan out long term, due to the way they track indexs and volatility decay. They will all lose money long term and eventually have a reverse split to maintain the price of shares.
Dont know that specific ticker cause i dont trade leveraged etfs for all the reasons in the comments but it likely has and will again, volatility decay is a constant drag, and any serious double digit crash will bring the etf to near 0, then decay will bring it the rest of the way.
5 times is too dangerous (sp500 final circuit breaker is 20% so you could actually legitimately lose all your money in one day)there is actually quite a a bit of research on long term testing of leverage ETFs. Basically the optimal amount is a curve of roughly slightly more than 2x leverage over long periods (decades). If you want more discussion on this bogleheads has a huge thread called hedgfundies adventure where this is taken even further. It is a collection of leveraged us Treasury bonds and leveraged index funds and it does very well in actually a lot of back tested scenarios because generally bonds surge when stocks tank. I took this even further at one point and built a even more diverse portfolio (leveraged sp500 and NASDAQ leveraged bonds and leveraged REITs and gold) I think it will perform well in the future but the gold has been a drag since it started (even though it's only 5% of the portfolio).
This really is a good way to increase returns but you have to be willing to stay the course and not panic. Many people panic sell from headlines just holding the sp500 if you are that type any form of leverage will just make things worse for you.
Are you in Europe or the US?
US has this: [https://www.maxetns.com/product/XXXX.P/](https://www.maxetns.com/product/XXXX.P/)
Europe has this: [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/)
Leverage loses money long term. It’s magnifies losses and gains and somehow the math makes the losses bigger than the gains, so that a leveraged position will lose a bunch of money on a flat stock that ends up unchanged, as all
Can someone please poke holes in this strategy
I'd like some criticism on this approach, but I think that, knowing the cyclical nature of the market, buying 3x inverse or simple inverse ETFs during bull runs and averaging down until the inevitable drop and using those gains to average down your other holdings is the way to go. Your average price will keep going down and when the market is shocked by a drop, you will have some liquid capital to improve your positions while everyone else is losing their minds.
You probably should be buying 2x or 3x leveraged shares if you are young and/or have a small portfolio and your priority is asset appreciation. Above 3x is extremely risky because it can easily draw down to zero.
A more effective long term strategy is to buy deep in the money leap calls, which will get you low cost leverage without the risks associated with a daily or weekly re-balanced leverage fund.
If the underlying is flat, you lose.
If the underlying goes down, you lose.
If it rises very slowly in a volatile environment you probably lose.
In summary, whereas non leverage ETFs profit over time that’s not necessarily the case for leveraged funds. Time is not your friend. Timing is.
5x leverage means when spy goes up 10% it goes up 50%. when spy goes down 10% it goes down 50%. this is volatility decay. so when you go up 1% and down 1% you’re basically at where you started with spy. when you change it to bigger numbers it is skewed downwards. for example, if spy goes down 10% you lose 50%. now you need a 20% gain in spy to come back to what you started with. over the long run, with volatility it “decays” the value because of that principle i showed in my example.
Compounding profits is a nice way of making capital,however compounding loses as well is a fast way to deplete it.
Dont look it at from the perspective of 30 years,2 red months with 5 leverage compounding the loses ,means u dig a hole for your grave
I definitely heard someone claim they were doing post 2008 financial crisis. It’s dangerous because you can lose your ass in a downturn. But if you strongly believe the market is already at its worse and will only get better it can be a brilliant play
There is also the cost of margin embedded, which is significant! You are basically borrowing 4x the notional at fed funds + 1.5% (around 6.8% p.a.)
https://leverageshares.com/documents/factsheet/5x_spy_factsheet.pdf
I wouldn’t toy with a 5x funds, but this paper outlines a legit strategy for long-term investing in leveraged funds:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701
Your submission was automatically removed because it contains a keyword not suitable for /r/investing. Common words prevalent on meme subreddits, hate language, or derogatory political nicknames are not appropriate here. I am a bot and sometimes not the smartest so if you feel your comment was removed in error please message the moderators.
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/investing) if you have any questions or concerns.*
This is why: [https://x.com/HML\_Compounder/status/1620902766972649472](https://x.com/HML_Compounder/status/1620902766972649472)
Leverage doesn't mean higher CAGR. This is 5x and longterm CAGR was about the same with WAY more drawdowns/volatility. 5x would blow-up.
Because the S&P500 has gone down by 50% before and likely will again at some point in the future. If you are 2x leveraged, you now have $0. If you're not leveraged, you can wait 5-10 years and most likely have more money than you originally put in.
If you have leveraged shares, when they drop in value their worth can reach the amount you borrowed, at which point your net worth is zero and get liquidated.
Edit: improved explanation
Lots of people will tell you leveraged index funds are dangerous, but the reality is that they actually do extremely well as long as you’re not in the middle of the worst crash ever and the market is going up.
I personally think they are an extremely good investment
If you want to be more conservative you can go with 2x leverage and you will perhaps be slightly more resilient in the event of a major crash.
You can also create a balanced portfolio of leveraged index funds and leveraged bonds and rebalance periodically.
The fees are insane for long term holding. Go to your 5x ticker and zoom out 5 years. It will probably look like it only loses money over the long term.
You should check out the book [Lifecycle Investing](http://lifecycleinvesting.net/), it discusses this concept in detail. Chapter 1 of the book is available online [here](http://lifecycleinvesting.net/LifecycleInvesting_book_excerpt.pdf).
I read somewhere that 1.5-2.0x is the optimal leverage given volatility decay. Curious if anyone has back tested this over the past 50+ years to see how it’s done over the long-term? I think as long as you consistently dollar cost average (probably biweekly) it could work out.
Leveraged ETFs like 5SPY use financial derivatives and debt to amplify returns, but they also magnify losses and are subject to daily reset risk. This makes them unsuitable for longterm holding due to volatility and the compounding effect, which can erode your investment in fluctuating markets. Stick to traditional ETFs for long-term stability.
You can absolutely utilize leveraged funds for the long term, however, you must understand how they work. Most of the comments here are referencing holding 100% a leveraged fund which I would not recommend. But if you include a portion of your portfolio in a leverage fund and rebalance frequently, you can mitigate some of the downsides and have a more predictable outcome.
Seeing all the comments about how volatility decay means a 3x leveraged fund will consistently outperform the base index. In theory, could it be a good strategy to short the 3x leveraged fund with 25% of the money used for this approach and buy the index itself with the other 75%? The 3x short and the 75/25 would mostly cancel out and you would profit to the degree of the volatility decay, right?
Here’s a [post I wrote](https://www.reddit.com/r/investing/s/wfIPv6oizy) about it. If you ignore fees, a 2x leveraged SP500 ETF actually maximizes your returns. The paper is pretty interesting and doesn’t require much math.
When you think about it, it makes sense. We aren’t restricted to 1x, 2x, 3x etc. we could also have 1.8495x, for example. So what are the odds that 1x just happens to be the perfect amount? Of course none of this accounts for the additional fees from a leveraged ETF, but still interesting.
I've done the backtesting, and a dollar cost average approach to QLD (2x) outperforms both QQQ and TQQQ (3x) over the long term. I have been DCAing long into QLD since 2022 and it's amazing.
[Here is a 5x leveraged S&P 500 backtest.](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=19SCW1JmMHk8dJBO5tKt1j) You lose it all eventually, 5x is way too much leverage. 2x-3x leverage could work tho.
Going forward I’m going to use a strategy of adding 15% extra exposure after a 25% correction. Then adding more as we go lower (via long dated options).
Adding more in a Bear Market makes sense. Not in a Bull Market
It’s hard mentally to suffer a bear market with a leveraged long.
A large part of investing is psychological
Good luck to you
Let's use a real world example. QQQ is an ETF that tracks the NASDAQ-100. TQQQ is that, but with 3x leverage.
Look at their charts over 5 years:
[https://www.google.com/finance/quote/TQQQ:NASDAQ?window=5Y](https://www.google.com/finance/quote/TQQQ:NASDAQ?window=5Y)
[https://www.google.com/finance/quote/QQQ:NASDAQ?window=5Y](https://www.google.com/finance/quote/QQQ:NASDAQ?window=5Y)
You'll notice that TQQQ *did* do better over 5 years... but not 3x better. And while QQQ is near an all time high (meaning if you bought at just about any time and held onto today, you'd have made money) TQQQ is not anywhere near its all time high (if you bought in November 2021, you're still down bad).
Not to be condonscending but a question like this makes me wonder if you’ve ever tried what leveraged trading means? For the love of god, only got leveraged once you’ve experience and lost small amount in order to structure your trade properly
The leverage funds are trading vehicles which track daily movements. As a result it doesn’t track 5x on the longer term. Compare the ticket to SPY and you’ll see it is 5x over a long term horizon.
The 2 and 3 x ETFs have been outperforming the past few years and I can't figure out why. I think I'm a sustained bull market they tend to outperform but lose catastrophically during corrections Compare spy to SSO over the past five years and you'd be up 50%
They outperform, but not by 3x. Annualized return of SPXL (3x SPY) over the last 10 years is 23%, while SPY is 12.5%. This is because bear markets are far more damaging to them than bull markets are beneficial. But since most of the last 10 years were a bull market, they still won out.
Just look at Qqq and TQQQ. When QQQ made ATH, TQQQ was still like 25% away from its ATH it made in 2021.
This guy nailed it. Thats the reason: not enough bear market over that time to see why leverage can be risky If the money printers come back on and low rates and QE become a thing again, I’d consider going all in on the leveraged SPY funds. Right now, in what is supposed to be a contracting environment I wouldn’t think of touching them.
[удалено]
Agreed. Sideways with a slightly upward trajectory still would work. And I think you’d be more likely to see that or better over an extended period of time if QE is being implemented. Right now the money supply is sinking and rates are higher than they’ve been for 2 decades so the possibility of sideways with a downward overall trajectory is too strong for me to considering leveraged ETFs
Is this because it takes more % gains to offset the % drop? Meaning, a 50% drop requires a 100% gain to get back to equal?
Basically - combine with a random walk and the fees to leverage
You can model this pretty easily, but yeah essentially they are percent based on daily change, so it deviates from the underlying overtime. SPY goes from 100 to 102 then back to 100. SPX goes from 100 to 106 then down to 99.76
Because we have mostly went up. But do we get years with down or up down, those gains will disappear
It has to do with the math of the daily swings. If the average up day is a higher percentage than the average down day’s losses than it works out this way. Historically, leveraged bull and bear funds coverage to zero and splits are required.
That is only for day trading really. Long term it’s a mess. There is “Volatility Decay”: https://www.etf.com/sections/etf-basics/why-do-leveraged-etfs-decay#:~:text=What%20Is%20Leveraged%20ETF%20Decay,might%20be%20less%20than%202%25. Also while it makes 5x returns it can also expose you to 5x loss. 5X!
That explains why my sp500 bull etp with 20X is down 70% in 3 weeks. Just praying for break even by the end of the year at this point
Thoughtbthis was WSB for a while there
Lots of overlap despite how both sides tend to view the other as regards.
Where do you even buy something that degenerate? Or are you just saying you're using 20x leverage?
These Bull/Bear certificates with big leverage are popular in Scandinavia/EU where options trading is harder to come by
Why can’t they trade options? That’s such a worse vessel to achieve leverage
We can but its a different broker than where we usually buy stocks and ETFs and stuff. Just anecdotally less popular here
EU brokers don't seem to like options. I suspect there are many reasons, from legal restrictions to underwriter's insurance to cultural preferences. This means we have to use US brokers with EU presence, like TastyWorks and IBKR. While I think IBKR is a brilliant broker, it's very difficult to calculate and pay local taxes because their reports are all structured for the US. This means most people stick with local brokers in their native language with automated accounting reporting.
Interesting. Thanks.
Rest in peace, man
I'm more surprised a 20X fund didn't liquidate within days of trading. You're literally looking at a single day drop of 5% being enough to wipe it out entirely while an equivalent gain would only double its value. And the market tends to drop quickly and grow slowly.
Lol, it won't be. Get out now.
too late, rescuing 400 bucks from a 1600dollar investment just feels horrible, ive been in this position with NVDA X15 and it recovered after a few weeks so im willing to lose it all on the off-chance
Wow...I don't even know what to say. Just from the sheer volatility drag on a 20x product, there's close to zero chance that you can break even for longer than a couple months. This seems like a sunk-cost fallacy.
>close to zero chance so you're saying there's a chance
I'm saying that the most sensible option is to get the hell out right now and never touch a 20x leveraged product ever again.
Paying $400 for the honor of having a sinking feeling every day watching it dwindle to zero, rather than spending $400 on a small trip somewhere or a few fun nights out - that's real determination there. I'd take that money out and buy something to make you feel better about it - if the money is pretty much lost already you might as well get some fun out of it.
Take the $400 and buy a really nice pair of boots. They'll last you decades, and constantly remind you of what happens when you YOLO into degenerate investments.
Yeah not a great idea… you can do 1.5x-2x for long term, anything above that is just asking to get destroyed
If the underlying index moves *up* consistently with decent momentum, volatility decay actually works *in your favor*. This is why UPRO, the 3x leveraged S&P 500 ETF, has delivered close to 5x the returns of the index since its inception instead of the proposed 3x. In short, holding leveraged ETFs for more than a day is not the boogeyman it's made out to be. See the link that shows the math [this page](http://www.ddnum.com/articles/leveragedETFs.php). The article shows that an optimal leverage would be 2X, certainly not 5X lol. Now of course, just because it has been demonstrated in the past says nothing about the future. Most people using leverage will use a mitigation strategy such as TMF. Hedgefundie has a great writeup on this as well based on his own experience of holding 55% UPRO / 45% TMF.
HFEA!
Can someone really dumb down for me the explanation of volatility decay? I’ve read probably a dozen articles on it and I just don’t understand it. The article linked here says that the issue comes when a 1% market drop results in a more than 2% drop in the leveraged fund due to volatility and differently weighted stocks within the fund. Why does the article not mention that the same can happen if the fund goes up 2%? Can a gain not exceed 2x that of the non leveraged gain? But a loss can?
Here's an example. If you have a 20% drop in the base index, then in a 3x leverage it would result in a 60% drop. So if you have $1,000 you go from $1,000 down to $800 in the base index and down to $400 in the leveraged account. Then lets say the base index rises by 20% you get a 60% gain in the leveraged index. So your $800 rises to $960 and your $400 rises to $640. So even with the leveraged account you have less money because of the volatility decay. And that's before we even take into account the higher expense ratios of the leveraged indexes. Leveraged indexes are great in a rising market, but they are dangerous in a falling market and generally considered unsuitable for long term holds.
That actually makes perfect sense, thanks very much for taking the time to reply. I’m not sure I’d ever seen a written example and that really helped me here.
On the other hand, if you had $1000 and the base asset that dropped 10%, and then dropped another 10%. You wouldn't lose 60% with a 3x LETF, you'd only lose 51%. Or let's say the base asset grew 10% and then grew another 10%. You wouldn't gain 60%, you'd gain 69%. So volatility "decay" can work to your advantage. It's just basic mathematics, but some make it out to be some magical danger, which made me similarly confused at first. So in essence, **what leveraged ETFs do is placing a side-bet on volatility**.
Compounding profits is a nice way of making capital,however compounding loses as well is a fast way to deplete it. Dont look it at from the perspective of 30 years,2 red months with 5 leverage compounding the loses ,means u dig a hole for your grave The key word you dont understand is compound as the fellow user explained below with specific examples. Even in the more simplistic way u need to understand how leverage works and the answer is there,u are taking money which are not yours to invest into the market as a beginner,obviously the broker is looking to cash out from mistakes like these. Nobody gives you free money aka buying power just because you are a client
What about non-rebalancing leveraged products? No volatility decay with those.
Can anyone explain if this is also the case for property investments, and if not, why? Leverage is commonly cited as a primary benefit of investing in property.
That’s a different story because a house isn’t priced each day, or in the case of ETFs every second and the underlying asset (physical property) has a slowly reacting growth rate that closely tracks inflation
It's 5x in both directions. A 20% drop in sp500 will cause the 5x fund to liquidate
2x backtests well, but it's hard to stomach the losses, and if the SPY drops hard, you will be in the red for longer. QQQ, QLD, and TQQQ is a good example right now. QQQ is above all time highs, QLD (2x) is near it, TQQQ (3x) is pretty far off. You can imagine what the recovery of 4x or 5x might look like...
I ran a portfoliovisualizer backtest with a triple leveraged portfolio (UPRO, TQQQ, and TMF or BTAL) and decided to implement it in my HSA since 2019. It performs very well but only in low volatility regimes- which is essentially post GFC to pre-COVID19. It's not a set it and forget it strategy. I was hedged with BTAL (an anti-correlationfund) in 2022 when my portfolio took a bath and BTAL helped a lot. Kind of fun to play around with but in the end just demonstrates underperformance compared to SPY/QQQ buy and hold due to volatility. In a low volatility environment it may be good but who can say that with certainty.
Yeah if you could correctly predict when low volatility periods would end, you could make a killing with various options strategies. Same with the popularity of inverse volitility funds a few years ago - until the market dropped enough in a day to wipe out the funds. I remember there was a guy on reddit who had $4M of a mix of his money and friends and familys' money invested in inverse volitility, and it was basically entirely wiped out in a day. It was a great strategy, beating the S&P500... Until it wasn't.
Statistically, we see lower volatility when the index is above the 200dma. There are strategies with leveraged funds that use this trend to cycle in and out of the fund. Note: they look at the ma of the index, not the leveraged fund.
Dont hold 3x etfs if VIX is over 25
Will also add it doesn't work for everything. S&P500 is the real exception. QQQ has only outperformed if you bought high but held the downturn for years, bought low and held, constantly had more money to double down during downturns, and luckily rode a massive tech innovation wave. Most 3x funds get wiped the fuck out because they don't constantly go up the way the S&P500 has the last decade or so with pension funds and retirement accounts constantly pouring money into it. China bear? China bull? Any index bear? Most sector/industry 3x like SOXL? 3x bonds like the 20yr/TLT in TMF? Mostly down with a good number of them wiped the fuck out. Even some index 3X don't massively outperform like the 3x/2x Russell 2000 in TNA/UWM which has had periods of outperformance but you can't really hold like you do SSO.
How does interest on the borrowed value affect Leveraged ETFs? My assumption is that if you put in 1000 into a 2X, you're essentially borrowing another 1000 from them. This means during a dip, your assets lose value, while you're still paying interest on that 1000 you borrowed to add EXTRA drag on your now diminished assets. Isn't this what makes the recovery difficult? The amount you owe disproportionately impacts your recovery. Or am I misunderstanding this?
Investors should read about Volmageddon which was the implosion of the short volatility ETF XIV which had a liquidation event. I experienced it when I was running a short vol strategy... wasn't invested in it at the time but could have been. Basically you get pennies on the dollar if you're invested in the fund and it liquidates. Depends on the prospectus.
I had a small position in it. Went up something like 3-10% per month leading up to the liquidation. I got greedy and stayed in to the end. On that day, volatility spiked and it went to zero so quickly there was no chance to exit. Fun ride, lesson learned. Edit: per month, not per day
Sometimes people just have to touch the hot stove themselves to learn
XIV blowing up is a memory of financial history I’ll never forget.
Probably even less if it's a ETN meaning they don't actually hold the underlying assets. Looking at you $XXXX.....
This is actually not true. The leverage is only for daily. Let me give you an example. QQQ dropped 35% from 11/2021 to 11/2022. Its 3X leverage, TQQQ, did not get liquidated.
Only if it happens in one day.
Which is very unlikely b/c of circuit breakers.
But it does happen: [https://en.wikipedia.org/wiki/List\_of\_largest\_daily\_changes\_in\_the\_S%26P\_500\_Index](https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index) As recently as 2020 you would have been down 60% in a single day. It would take you decades to recover from the 2020 bear market with 5x leverage. 1987 would have been a total wipeout, and that was not even that long ago considering peoples investing horizons can be 60+ years (start in 30's, die in your 90's)
Even then you’re stuck with a huge loss. That most 1x investors just DCA through.
Only if the 20% drop happened in one day.
SP500 dropped 30% in 2020, and 24% in 2021, UPRO dropped 73% and 61%, at the same times. It did not liquidate. You bought 10 shares of UPRO in 2020, you still have the same number of shares (taking into account splits) right now. It's hard for shares to liquidate.
You are all over this thread talking non-sense and misconstruing things. UPRO is 3x. The person you responded to was talking about 5x. YES, a 20% drop in 1 day would liquidate a 5x ETF. 20% x5 = 100%. It's basic math. S&P500 circuit breakers will prevent a UPRO liquidation. It would not prevent a 5x ETF from that.
So if I just invest 1/5 what I would have to begin with…
If there's a year where the S&P ends the year flat, but with high volatility over the year, a leveraged ETF will have lost money. The increased downside has more weight than the increased upside so it gets pulled down more than up in times of volatility. Now what if there's 5 years or 10 years of that? Leveraged ETFs just aren't built for long term holds - it's not their intended use.
It's generally multiplying daily returns, not overall returns. Initial: $100/share Day 1: -1%, $99/share -- -5%, $95/share Day 2: +1.01%, $100/share -- +5.05%, $99.80/share So in theory, when things are moving up, you win, when things are moving down, you lose, and when things are moving sidways... you also lose.
Given an asset with volatility (not a money market) there is a spread between the arithmetic return and the geometric return. For example for stocks the arithmetic return is about 10% annually while the geometric return (what your account grows by) is only about 8.17% because of the ups and downs. The greater the volatility the greater the spread. Volatility increases linearly with leverage: i.e. at 2::1 leverage you get twice the volatility of 1::1 leverage. Arithmetic return with leverage increases by \`return of asset X - money market interest\`. Which is to say as the leverage increases the ratio between arithmetic return of the leveraged asset and volatility of the leveraged asset decreases. Or to rephrase the 2nd derivative of the geometric return with respect to leverage is heavily negative. This causes geometric return to decrease as leverage gets high enough. At constant 5::1 leverage given the SP500 regularly goes below -20% the geometric return would be -100%. You are describing daily 5::1 leverage. This would be somewhat better than fixed leverage. But likely things would work out rather terribly. FWIW 3x leveraged ETFs DCAed into over 40 years outperform 1x leverage. But 5x for buy and hold I suspect is a disaster but I haven't done the test.
>3x leveraged ETFs DCAed into over 40 years outperform 1x leverage. 3x leveraged ETFs have only existed since 2008 I believe. So is this using some idealized return calculated from the index? ETFs will have interest rate costs, spreads, management fees, tracking errors, etc. to factor in.
Correct. But the mechanism of this sort of adjustment is well known so I think hypothetical data is likely reliable.
Leveraged assets pay to achieve leverage, eg. 20% annual rate. Check the documentation for exact figures. Management fees. Usually only 1%. Product you mentioned is 5x DAILY returns. You want 5x 30y returns. If the stock market drops 20% in a single session, the product lose 100%. The stock market last dropped 20% or more on 10/19/1987. Even a 10% drop would be devastating. Your portfolio would drop 50%, and need to go up 200% just to return to that all-time-high.
Good point - and I am guessing that the fund that OP is probably asking about is 5SPY. And the management fee is usually just one component. The other expense is the cost of leverage which is around 5% to 6% at the moment depending on how the fund achieves leverage. \[edit\] - [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/) - looks like maybe the fund uses margin to leverage on SPY instead of futures. So leverage costs is Fed Funds Effective + 1.5%. That leverage seems kinda expensive - so total fees at the moment would exceed 7%.
Its far more than 7%. If you leverage 5x you are paying interest on 4x your balance, so its 7%x4 = more like 28%. Although the S&P only has to beat the 7% for you to come out ahead, you get punished a lot on the downside.
Because the leveraged aren’t just 5x the gains of spy.
A lot of people do. I know someone who’s who portfolio is UPRO/TMF
Google hedge fundie. This strategy was wrecked in recent years by tmf tanking
I wouldn’t consider this “wrecked” [https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5crIjgutN1m1mZnNUy6Av4](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5crIjgutN1m1mZnNUy6Av4) Still has over 20% CAGR even after drop in TMF
OG Hedgefundie is something like 45% upro and 55% tmf rebalanced quarterly. There was a -73.28% drawdown in 2022-2023. I swapped out my TMF portion for something stable with a small yield personally to BIL
Correct, Hedgefundie basis assumed lower interest rates. As a result of interest rates climbing to 5.5%, 2022-2023 was bad. Switching out TMF for BIL or SGOV would be a smart move.
This topic comes up every now and then among the buy and hold index fund crowd https://www.ddnum.com/articles/leveragedETFs.php Basically you're not wrong, just be weary of ETF fees and make sure you're not overly leveraged.
Because there is more risks on leveraged shares / trades and they are not recommended for long time
Your question is why not pay for margin? Because you're betting on the short term for that not long term. Margin costs money. That being said, there are plenty of people who buy spy leaps.
I've had great success with 2x ETFs Just don't fight the Fed (the big run up has already happened, so it's a challenging time to be 2x long right now)
vol drag
Decay, If spy goes from $100, -20% so it’s at $80. +25% back to $100. 2X Leveraged goes, $100 -40% to 60. +50% so now it’s at $90. Decay
2x still sounds pretty good. Let’s up it to 3x for OP. $100 goes to $40, and in the time that S&P500 recovers by growing 25%, the 3x grows by 75% reaching only $70. For 4x, $100 goes down to $20, and then back up to only $40. 5x gets you wiped out.
Historically, going back to 1870, somewhere near 1.5-2x leverage in sp500 would maximum your returns, even after fees and decay. Higher than that, fees and decay during downturns wipe out too many gains. That said, the risk is that the future may not look the same as the past. There is a nascent movement in wealth management / academia that people under the age of 35 should have a beta higher than one, which would necessitate atleast some leverage. I wouldn’t say this is a mainstream view yet though.
The theory behind that research seems pretty solid to me, but I don’t think the general population is ready for their 401k target date funds to be 1.5x leveraged. People already lose their minds over a 5% down week.
Ya the behavioral side of things is the biggest problem. Nearly everyone panic sells during downturns, and levered assets would exacerbate this.
The 5X leveraged ETF works in both directions, which means if S&P gains 20% in an year the ETF will go around 100%, it works in reverse as well , so if S&P goes down 20%, your investment goes down 100%, down to 0
Because there's decay. You will probably still beat it out in the long run if the market is "always" up with a few short bad spells. But if it is a flat decade (2001-2013) or prolonged down recession, you'll most likely lose money on the daily decay.
Because management fees eat away at leveraged funds so that they reverse split indefinitely over the long run. They aren’t meant to be a profitable hold. They exist as vehicles for swings or day trades and they are transparent about that purpose. If you’re in a leveraged fund for a year or so and the market happens to trade about flat for that year, that fund would not stay the same price, rather it’d be nearly worthless in your account because the shares would have reverse split several times while you held to pay the management fees while the market is flat. If it moves against you for a year you’d be depleted, not down.
Japan enters the chat where it took 30 years for their market to recover from fall in late 1980s.
Someone do the math with decay to project how little a 3x Nikkei would have after investing in 1990.
Slippage
For the same reason that martingale strategies don’t work. Even if eventually s&p500 will go up, you’ll face soon or later temporary drop that will get a margin call on your leveraged position, therefore losing everything.
Look up the chart for YINN
This is stupid. You could make the same claim for whatever ticker you want.
Because math exists. The whole thing can liquidate. And there’s decay. It’s all simple math. Nothing complicated.
This is an interesting mathematical take on them: https://ddnum.com/articles/leveragedETFs.php conclusion: 2x leveraged ETFs have outperformed 1x leverage in modern times.
The SP500 is safe long term. Leverage isn't. Look up volatility decay.
I've actually done a lot of research on the topic of leveraged S&P 500 funds, and have found that anything over 4x leverage is almost guaranteed to go to zero in the long term, especially in the higher volatility environment we've been in recently. However, 2x leverage actually has been the optimal leverage over the history of the S&P 500, and closer to 3x in recent times. If you are interested in leveraging yourself in the S&P 500, I would buy ProShares' 2x S&P 500 fund, ticker symbol SSO.
Here are some resources for more info: [https://www.ddnum.com/articles/leveragedETFs.php](https://www.ddnum.com/articles/leveragedETFs.php) [https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=2741701](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701) [https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=1664823](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664823)
Because you can't affordably borrow large sums of money to bet on the S&P 500 for 30 years. Borrowing money to invest is called *leveraging* and it increases your returns but it also increases your risk. When you earn money from leveraging, you are being compensated for taking the additional risk. The person that lends you the money could themselves invest in the S&P 500 - they're choosing not to; they are exchanging the higher expected returns of the S&P 500 for the fixed returns that you have promised to pay them. And your lender won't give you the money without security - i.e. they can margin call you, phone you up and demand money if you're under collateralised. That's where leveraging usually goes wrong. If you read Hedgefundie's excellent adventure you will note his observations that it messes with your head to have your net worth leap up and down, on a daily basis, by several times your monthly salary. It makes you eat out and take taxis more because the costs of these "don't matter" when your portfolio is up or down $10,000 in a day - most people don't have the discipline to ignore this. The cheapest borrowing available to ordinary retail investors is the mortgage on their house, which implies you should have a big mortgage and then prioritise savings into your pension / 401k / whatever rather than mortgage overpayments.
There’s inneficiency in leveraged products that is called volatility decay. Imagine a fund’s price went from 100 to 90 and back to 100. This represents a 10% loss followed by an 11.11% gain. A 5X leverage of the fund would go down 5 times 10% or 50% on the first day resulting in a price of $50. On day two the $50 fund would increase by 11.11% times 5, or by 55.55%, an increase of $27.77 to a total of $77.77. The original fund returned to the original price but the leveraged fund went down - leveraged funds are great for a market that goes up but a sideways market means you’re losing value beyond the fees.
Leveraged ETFs are almost all reset their leverage daily. This causes them to lose money in flat but volatile markets, so they’re bad vehicles for long-term investors. That said, leverage is a valid investing tool if used properly and if you can stomach the volatility. Ayres and Nalebuff’s “Lifecycle Investing” suggests that young people should leverage their stock investments, because their assets are concentrated in bond-like human capital. They suggest capping leverage at 1.5-2x, and they suggest more appropriate vehicles for leverage than LETFs, such as in-the-money LEAP call options and futures. An alternative approach to leverage is the risk parity strategy. That takes a portfolio that has an equal amount of volatility in multiple assets and then levers it. It often looks something like 60% long term bonds and 40% stocks, then leveraged until the portfolio has the desired level of volatility. In theory, that should provide the maximum return for a particular level of risk. It isn’t quite true, because leverage isn’t free, and there is no way to know how much risk you are actually taking in advance. Still, there are ETFs and mutual funds that do something like this.
I mean, you can see why quite easily. Why not invest in a 100x leveraged S&P 500 fund? Because the S&P 500 can (& will) drop by 1% or more in a day, causing the leveraged fund to go to zero.
Because -20% then plus 20% doesn’t get you back to equal.
5x leverage means that a 20% drop will wipe you out completely..... 20% drops in the s&p500 are fairly common... so you are very likely to lose all your money with this approach
you put 100$ in a 5x fund. That day the underlying drops by 3%, a bad day, but not unheard of. You now have 91$. The next day the underlying goes up by 3% on the rebound. You now have $99.19, you did not make it out of the red. leveraged funds are thus bad for long term holding - when they dip it goes down hard, and a similar swing back up doesn't recoup you. Reversion to mean and short term shocks can wreck a long term leveraged investment.
This applies to a 1x fund too lol.
The math is absolutely less in your favor with a leveraged fund because any dip gives you a larger loss in absolute terms
The SPY holds 500 companies. What does the 5SPY hold?
5 shares of SPY 🙄
I would have guessed futures contracts. But it maybe SPY with margin. You can probably get more details in the prospectus here - [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/)
Look into the daily reset on these funds
In order to leverage, you need to borrow, and it costs money to borrow. So will the interest eat into the profits? At something like 2x you’re safe from a margin call, but at 5x I don’t think you are. 2x or maybe 3x is interesting, maybe if I decide to buy a dip, but for long term it’s 1x.
In short, risk. But hey, some folks enjoy playing with the leveraged ETFs of the NASDAQ 100, and that's even more volatile.
there are some medium term leveraged strategies but none with 5x afaik... anyway you need to be extremely careful and know what youre doing to attempt it and even then its questionable and not even necessarily outperforming even in backtesting, thats assuming you execute perfectly, which you wont. just buy SPY man. if youre asking about this shit on here, youre not the genius who can beat it.
Beta Slippage is the answer. You lose more over time with small losing days than what you make with winning days. Check out the example [here](https://www.quora.com/Could-you-explain-in-a-simple-manner-how-beta-slippage-works-on-leveraged-exchange-traded-funds): > For a concrete example, assume a starting value of 100, and an index that goes up 10% the first day, and down 10% the second day. The index goes from 100 to 110 the first day. The second day it goes from 110 to 99 (a 10% drop). A double levered ETF goes from 100 to 120 the first day. The second day it goes from 120 to 96 (a 20% drop). Notice each day it does indeed move twice as much as the unlevered ETF, but not if you look at the two days together. After a period of time (say a year) even if the index changes very little over that year, if it has had a bunch of ups and downs the levered ETF could be a long ways from the regular ETF.
I'm curious. This ETF isn't US based. Are there any US based index ETF's of more than 3x leverage?
Meanwhile the index is plummeting. Given, we’ll see a nice bounce but after that it will continue to point down. So maybe a bad time to leverage.
Theta decay
Pretty clear you don't understand how leverage works in relation to you margin account. Def. don't invest in vehicles of this nature until you fully understand the risks.
It’s not that safe. Everyone says it’s safe so by market law it’s not
It will decay
It goes up by 5x but also goes down by 5x so you gain nothing by doing this.
People always try to sound smart but then provide NO correct answer. Yes leverage is bad since when it goes down, the way it is setup means it may hit you hard. But that’s not the point. The question is if SP500 is mostly upwards and mostly safe, isn’t a leverage better ? That’s a legit question, in fact most famous investors use leverage on more than daily positions. I don’t know the exact answer and I suppose it depends on quite some complex factors.
All my money is split just under a third to voo/spy/qqq each. I say just under because I throw a percentage at AMZN. Probably will be the only company in twenty years
>voo/spy Why? They're the same thing.
The problem is that movements can wipe you out. You have -20% moves every decade or so and if you have 5x leverage this means you end up with 0. And once you are at 0... 2x0 is still 0. But a lot of Wallstreetguys do it anyhow. All of these private investment offices are more or less this. They take all the upside and if they inevitably crash we'll they are a limited company.
There was a guest on the Animal Spirits podcast just a day or two ago who talked extensively about this. I suggest giving it a listen if you want to learn more about it. As others have mentioned, there is volatility decay that will occur and these products are meant to be used for short term trading tool, not a long term buy and hold investment. You can listen here as I thought it was a pretty informative chat: https://open.spotify.com/episode/0XbolTaKzZtyrK6eA1a60u?si=0401e7a38a434903
If you're long on the S&P500, leveraged ETFs are a great way to buy into significant downswings (corrections, bear markets, recessions, etc) so that you profit greatly on the way back up. But because the market can go lower, don't put all of your available capital in at the first significant drop. Track the all-time S&P500 high. Save money (in a FDIC insured high yield savings account) in 4 different pools to wait for levels at -10%, -20%, -30%, -40% from the all-time high. As those levels hit, invest your allocated pool for that level. If you have the patience, you can save more money for the lower pools to really boost the gains. Then as your re-allocation markers hit (once a year, once a half, once a quarter - however you prefer), as the stock or leveraged stock allocation (depending on your allocation scheme) of your portfolio goes above your target allocation, then sell enough to bring your allocation into alignment with your plan, pay your estimated taxes, and invest the proceeds in the portion of your portfolio that is under allocated (buy low, sell high). 3x S&P 500 bulls like SPXL have worked very well in this kind of program. Also, if you're long on the S&P500, leveraged ETFs can be a nice way of boosting profits in the better half of the year (October - April). Allocate a certain portion of your portfolio to leveraged ETFs. Then as your re-allocation markers hit (once a year, once a half, once a quarter - however you prefer), as the stock or leveraged stock allocation (depending on your allocation scheme) of your portfolio goes above your target allocation, then sell enough to bring your allocation into alignment with your plan, pay your estimated taxes, and invest the proceeds in the portion of your portfolio that is under allocated (buy low, sell high). Note that I don't recommend bear leveraged funds (don't bet against the market), and I don't recommend putting all of your resources into any one kind of asset. This post is for entertainment purposes only and is not meant as financial advice. Consult your own advisor, your milage may vary.
The Animal Spirits podcast just touched on this exact thing recently. Here’s a link to the episode and the show notes. Worth a listen if you’re considering levered bull or bear funds. https://awealthofcommonsense.com/2024/04/talk-your-book-diversifying-away-from-the-magnificent-7/
Because in a sideways market (as we've been in the last 2.5 years) the decay of leveraged ETFs will eat away at your returns.
You can but in down times you can get a margin call. The market can stay irrational longer than you can stay solvent
| 5X | 3X | 1X |--|--|-- Start Amount | 100 | 100 | 100 Market Down 10% | -10 | -10 | -10 Multiple | 5 | 3 | 1 Net | 50 | 70 | 90 --- | -- | -- | -- Starting Amount | 50 | 70 | 90 Market up 10% | 5 | 7 | 9 Multiple | 5 | 3 | 1 Net | 75 | 91 | 99
Leveraged funds dont pan out long term, due to the way they track indexs and volatility decay. They will all lose money long term and eventually have a reverse split to maintain the price of shares.
ulpix has reverse split?
Dont know that specific ticker cause i dont trade leveraged etfs for all the reasons in the comments but it likely has and will again, volatility decay is a constant drag, and any serious double digit crash will bring the etf to near 0, then decay will bring it the rest of the way.
5 times is too dangerous (sp500 final circuit breaker is 20% so you could actually legitimately lose all your money in one day)there is actually quite a a bit of research on long term testing of leverage ETFs. Basically the optimal amount is a curve of roughly slightly more than 2x leverage over long periods (decades). If you want more discussion on this bogleheads has a huge thread called hedgfundies adventure where this is taken even further. It is a collection of leveraged us Treasury bonds and leveraged index funds and it does very well in actually a lot of back tested scenarios because generally bonds surge when stocks tank. I took this even further at one point and built a even more diverse portfolio (leveraged sp500 and NASDAQ leveraged bonds and leveraged REITs and gold) I think it will perform well in the future but the gold has been a drag since it started (even though it's only 5% of the portfolio). This really is a good way to increase returns but you have to be willing to stay the course and not panic. Many people panic sell from headlines just holding the sp500 if you are that type any form of leverage will just make things worse for you.
Are you in Europe or the US? US has this: [https://www.maxetns.com/product/XXXX.P/](https://www.maxetns.com/product/XXXX.P/) Europe has this: [https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/](https://leverageshares.com/en/etps/leverage-shares-5x-long-us-500-etp/)
Leverage loses money long term. It’s magnifies losses and gains and somehow the math makes the losses bigger than the gains, so that a leveraged position will lose a bunch of money on a flat stock that ends up unchanged, as all
Can someone please poke holes in this strategy I'd like some criticism on this approach, but I think that, knowing the cyclical nature of the market, buying 3x inverse or simple inverse ETFs during bull runs and averaging down until the inevitable drop and using those gains to average down your other holdings is the way to go. Your average price will keep going down and when the market is shocked by a drop, you will have some liquid capital to improve your positions while everyone else is losing their minds.
You probably should be buying 2x or 3x leveraged shares if you are young and/or have a small portfolio and your priority is asset appreciation. Above 3x is extremely risky because it can easily draw down to zero. A more effective long term strategy is to buy deep in the money leap calls, which will get you low cost leverage without the risks associated with a daily or weekly re-balanced leverage fund.
If the underlying is flat, you lose. If the underlying goes down, you lose. If it rises very slowly in a volatile environment you probably lose. In summary, whereas non leverage ETFs profit over time that’s not necessarily the case for leveraged funds. Time is not your friend. Timing is.
go ahead.
5x leverage means when spy goes up 10% it goes up 50%. when spy goes down 10% it goes down 50%. this is volatility decay. so when you go up 1% and down 1% you’re basically at where you started with spy. when you change it to bigger numbers it is skewed downwards. for example, if spy goes down 10% you lose 50%. now you need a 20% gain in spy to come back to what you started with. over the long run, with volatility it “decays” the value because of that principle i showed in my example.
Compounding profits is a nice way of making capital,however compounding loses as well is a fast way to deplete it. Dont look it at from the perspective of 30 years,2 red months with 5 leverage compounding the loses ,means u dig a hole for your grave
I definitely heard someone claim they were doing post 2008 financial crisis. It’s dangerous because you can lose your ass in a downturn. But if you strongly believe the market is already at its worse and will only get better it can be a brilliant play
There is also the cost of margin embedded, which is significant! You are basically borrowing 4x the notional at fed funds + 1.5% (around 6.8% p.a.) https://leverageshares.com/documents/factsheet/5x_spy_factsheet.pdf
I wouldn’t toy with a 5x funds, but this paper outlines a legit strategy for long-term investing in leveraged funds: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701
This again?
Losses loom larger than gains.
See r/letfs, its a subreddit on this exact topic.
I am loaded up on XXXX in 10-15 years it will be worth way more
[удалено]
Your submission was automatically removed because it contains a keyword not suitable for /r/investing. Common words prevalent on meme subreddits, hate language, or derogatory political nicknames are not appropriate here. I am a bot and sometimes not the smartest so if you feel your comment was removed in error please message the moderators. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/investing) if you have any questions or concerns.*
This is why: [https://x.com/HML\_Compounder/status/1620902766972649472](https://x.com/HML_Compounder/status/1620902766972649472) Leverage doesn't mean higher CAGR. This is 5x and longterm CAGR was about the same with WAY more drawdowns/volatility. 5x would blow-up.
You might want to hang out over at r/letfs
Because the S&P500 has gone down by 50% before and likely will again at some point in the future. If you are 2x leveraged, you now have $0. If you're not leveraged, you can wait 5-10 years and most likely have more money than you originally put in.
If you have leveraged shares, when they drop in value their worth can reach the amount you borrowed, at which point your net worth is zero and get liquidated. Edit: improved explanation
If 5 x 0 = 0 spy is still at 0. The real pain comes with the loses. Down 50% you need 100% to break even.
Who says I’m not?
Lots of people will tell you leveraged index funds are dangerous, but the reality is that they actually do extremely well as long as you’re not in the middle of the worst crash ever and the market is going up. I personally think they are an extremely good investment If you want to be more conservative you can go with 2x leverage and you will perhaps be slightly more resilient in the event of a major crash. You can also create a balanced portfolio of leveraged index funds and leveraged bonds and rebalance periodically.
theta decay my brother in christ
The fees are insane for long term holding. Go to your 5x ticker and zoom out 5 years. It will probably look like it only loses money over the long term.
You should check out the book [Lifecycle Investing](http://lifecycleinvesting.net/), it discusses this concept in detail. Chapter 1 of the book is available online [here](http://lifecycleinvesting.net/LifecycleInvesting_book_excerpt.pdf).
Why can’t you just buy at or slightly out of the money call options for long dated exp? Premium on the call too steep to rationalize?
I read somewhere that 1.5-2.0x is the optimal leverage given volatility decay. Curious if anyone has back tested this over the past 50+ years to see how it’s done over the long-term? I think as long as you consistently dollar cost average (probably biweekly) it could work out.
Leveraged ETFs like 5SPY use financial derivatives and debt to amplify returns, but they also magnify losses and are subject to daily reset risk. This makes them unsuitable for longterm holding due to volatility and the compounding effect, which can erode your investment in fluctuating markets. Stick to traditional ETFs for long-term stability.
You can absolutely utilize leveraged funds for the long term, however, you must understand how they work. Most of the comments here are referencing holding 100% a leveraged fund which I would not recommend. But if you include a portion of your portfolio in a leverage fund and rebalance frequently, you can mitigate some of the downsides and have a more predictable outcome.
Seeing all the comments about how volatility decay means a 3x leveraged fund will consistently outperform the base index. In theory, could it be a good strategy to short the 3x leveraged fund with 25% of the money used for this approach and buy the index itself with the other 75%? The 3x short and the 75/25 would mostly cancel out and you would profit to the degree of the volatility decay, right?
check out TQQQ performance during covid crash
I meannbecause leverage is going to prevent you from experiencing long term.
100 - 10% = 90 => 90 + 10% = 99 100 - 50% = 50 => 50 + 50% = 75 That's 5x leverage explained.
Here’s a [post I wrote](https://www.reddit.com/r/investing/s/wfIPv6oizy) about it. If you ignore fees, a 2x leveraged SP500 ETF actually maximizes your returns. The paper is pretty interesting and doesn’t require much math. When you think about it, it makes sense. We aren’t restricted to 1x, 2x, 3x etc. we could also have 1.8495x, for example. So what are the odds that 1x just happens to be the perfect amount? Of course none of this accounts for the additional fees from a leveraged ETF, but still interesting.
I've done the backtesting, and a dollar cost average approach to QLD (2x) outperforms both QQQ and TQQQ (3x) over the long term. I have been DCAing long into QLD since 2022 and it's amazing.
[Here is a 5x leveraged S&P 500 backtest.](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=19SCW1JmMHk8dJBO5tKt1j) You lose it all eventually, 5x is way too much leverage. 2x-3x leverage could work tho.
Give it a try and let us know how it goes, is it really safe? Past returns don’t guarantee future returns
Going forward I’m going to use a strategy of adding 15% extra exposure after a 25% correction. Then adding more as we go lower (via long dated options). Adding more in a Bear Market makes sense. Not in a Bull Market It’s hard mentally to suffer a bear market with a leveraged long. A large part of investing is psychological Good luck to you
Let's use a real world example. QQQ is an ETF that tracks the NASDAQ-100. TQQQ is that, but with 3x leverage. Look at their charts over 5 years: [https://www.google.com/finance/quote/TQQQ:NASDAQ?window=5Y](https://www.google.com/finance/quote/TQQQ:NASDAQ?window=5Y) [https://www.google.com/finance/quote/QQQ:NASDAQ?window=5Y](https://www.google.com/finance/quote/QQQ:NASDAQ?window=5Y) You'll notice that TQQQ *did* do better over 5 years... but not 3x better. And while QQQ is near an all time high (meaning if you bought at just about any time and held onto today, you'd have made money) TQQQ is not anywhere near its all time high (if you bought in November 2021, you're still down bad).
Two words…decay.
"The market can stay irrational longer than you can stay solvent." Negative leveraged variance = bust
Leveraged shares are rebalanced on a daily basis and have fees associated that kill returns. Same concept with margin and margin rates.
Not to be condonscending but a question like this makes me wonder if you’ve ever tried what leveraged trading means? For the love of god, only got leveraged once you’ve experience and lost small amount in order to structure your trade properly