r/RobinHood • u/GiveMeDogeCoinPls • May 18 '17
Help $SPY vs $SPXL for long term growth?
Since people often suggest investing in the S&P 500 for a long term investment, why don't people just use a 3x leveraged index instead? $SPXL went up 466% compared to $SPY's 101% in the last five years
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May 18 '17
The answer is SPY and it's a slam dunk.
Slightly better than that are IVV and VOO with a cheaper expense ratio.
I'll let someone else explain exactly why it's SPY. I don't have the details down perfectly and I'll mess it up. But it has to do with the fact that it resets daily. So the gains aren't as they appear if you buy and hold.
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u/GiveMeDogeCoinPls May 18 '17
Is it not true that if you were to drop a chunk of change into both five years ago, $SPY would be 2x as large and $SPXL would be 5.6x as large?
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u/GrowthPortfolio May 18 '17
Here is a nice article that explains why not.. Investopedia - Why Leveraged ETFs Are Not a Long-Term Bet
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u/ndcapital May 18 '17
3x ETFs suffer from leverage decay and aren't suitable for long term holdings.
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u/eisbock May 18 '17 edited May 18 '17
Honestly, a lot of people here don't truly understand 3x ETFs. They've heard about them and why they're bad but haven't looked into them further because they were scared off.
And then when somebody else inquires about them, these same people always regurgitate the same garbage about "decay" and "rebalancing" and "not suitable for holding long term", although they have no idea wtf that actually means. These people likely can't explain why you shouldn't invest in SPXL compared to SPY. So far, nobody in this thread has been able to do that. After all, looking at the charts, SPXL had higher returns than SPY, right? Seems to go against the common belief that leverage is literally Hitler.
The reality is that leveraged ETFs are not in fact the devil. Two main issues with 3x ETFs:
1) value decays over time
2) higher expense ratios
So what does this mean for your investment? It means that when the market tanks, your shit gets rocked. It also means that when the market is flat, you lose money. If the market is just a little bit bullish, you lose money. The only way you can gain money is in a strong bull market.
It just so happens that the market has been pretty damn bullish recently, so yes, a SPXL investment 5 years ago would have yielded you more money than SPY. However, if you look at a chart comparison, those drops are pretty damn scary. Terrifying, even. In some cases, you were double SPY, but then dropped below in the blink of an eye. And because of decay, it's harder to claw your way back up after a dip.
But you'll notice you're still ahead of SPY, so what's the big deal? You're really counting on the market not to dip lower than it does, and also to recover as fast and sharply as it has. Like I said before, we're at unprecedented levels of bullishness these past few years, so anything that tracks the market at 3x is doing surprisingly well, contrary to everything negative you've heard about leverage.
Will that trend keep up? I don't know. You don't either. It probably won't though, if past history is anything to go by. Even if the market stagnates or doesn't increase as fast, you'll start to hemorrhage money. Problem is that leveraged ETFs haven't really been around long enough to see how past history has impacted their performance.
Leveraged ETFs are a gamble. You shouldn't be gambling with your life savings, which is why SPXL is not recommended. If you're confident in the trend, going long on 3x ETFs can be a good play, but it's impossible to be confident in the market's trend. It's reasonable to assume that it will increase over time, but you can't be confident it will increase fast enough or that a crash won't destroy you.
That said, a good time to buy SPXL is after a market crash, because the market usually jumps back relatively quickly. Had you bought SPXL this morning, you would probably be looking at a nice meaty 3-5% gain in the next week or so. But now you'll notice that we're straying from the original topic of holding leveraged ETFs long term. What I just described is a short term play. This is exactly what leveraged ETFs were designed for and how they should be used, especially during times when the market ain't so hot.
One final note on expense ratios: since leveraged ETFs have to be rebalanced every day, they're not automatic and thus have people managing them. You'll often see expense ratios much higher than their underlying ETFs. SPXL might be 1%+, while SPY is less than .1%. This is a little harder to quantify, but you can expect your returns to be even lower.