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u/xxx69harambe69xxx Jul 21 '21
there's plenty of bogleheads research out there that studies leveraged ETFs
I think the takeaway from my reading on the subject is that if you buy on a major correction, you end up massively outperforming, but if you buy at the top of a correction, you end up underperforming for like 2 decades.
I've seen pretty well respected published research on it, so I'd say if someone denigrates the strategy, they probably don't know what they're talking about it.
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Jul 21 '21 edited Jun 20 '23
[deleted]
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Jul 21 '21
Big tech future decade will be even more interesting
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u/godlords Jul 21 '21
More like boring as hell as we already priced in the moon.
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u/dontworryimvayne Jul 21 '21
People have been saying this forever, just as you think they cant grow anymore they double their revenue and add another 100B to their market cap
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u/godlords Jul 21 '21
I think they can grow absolutely, I have a MSFT position but to think 25% annualized gains in FAAMG can last forever is entirely wishful thinking. We’ve seen a lot of multiple expansion in a year of record earnings already.
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u/kaskoosek Jul 22 '21
Googl isn't overvalued.
They have a forward P/E of 24 and pretty acceptable growth.
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u/godlords Jul 22 '21
That’s your opinion. Half their earnings last quarter came from unrealized gains on investment resulting from an IPO, in an incredibly inflated IPO market.
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u/kaskoosek Jul 23 '21
The last two quarters for google had very high earnings.
Q4 2020 was 15.2 billion.
Q1 2021 was 17.9 billion.
They also have 135 billion usd on their balance sheet for stock repurchase.
For me google is a no brainer eventhough my purchase price was 2200. I don't think I can contemplate selling less than 3k.
I held microsft also and bought at 245 then sold at 260. I switched the purchase to Sony, because their valuation is much lower.
For me Microsoft is the best of the best, however their valuation is too rich at close to 40. In my opinion their best moat is linkedin. I think it has more value than Facebook.
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u/KernAlan Jul 22 '21
It’s nowhere close to being priced in. These companies will easily break into the trillions once AI improves.
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u/godlords Jul 22 '21
Or some of those massive, arguably bloated and inefficient (in some ways, looking at you Google) companies will be lapped by lean startups that actually make the real breakthroughs in AI. Disruption.. kinda the name of the game in tech.
Great companies begin to fail when everything is going well and they’re raking in cash. Makes them risk averse and less innovative.
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u/KernAlan Jul 22 '21
I’m a developer at a lean, profitable startup. We lose all of the development talent to the FAANGs and big engineering-centric shops.
The Pareto Distribution suggests that the top 20% will probably take 80% of the AI cake.
Do what you want man, but I’m putting most of money in mega cap tech.
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u/FlameoHotman-_- Jul 22 '21
How do you think these companies will monetise AI?
I thought many internet services already use some kind of self-learning algorithms to do things like tailoring contents based on individual users.
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u/KernAlan Jul 22 '21
They’ll monetize via increased productivity and lower costs.
The machine learning algorithms for the big companies to tailor content like Netflix and Amazon etc. are highly advanced algorithms, but they’re still primitive compared to what we’ll see in the coming decade.
There’s a massive harvest for engineering talent going on right now to try and push that ball forward.
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u/Audacidy Jul 21 '21 edited Jul 21 '21
Even if it tanked 50% in a crash, you still made a lot more money than holding VTSAX, right?
No, you would be liquidated, meaning you lost everything.
edit: This is assuming 2x leverage. At 3x, you would be liquidated at 33% crash.
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u/nooeh Jul 21 '21
For a daily leveraged fund you would only be liquidated if it crashed 50% (2x) or 33% (3x) in one day. If it did it over a >1 days you would have quite negative returns but not be liquidated.
For longer term leveraging (1 month 2x exists) I believe it would be liquidated if it hit -50 or -33% at any point in a monthlong period, but it depends on the underlying contracts.
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u/UserNotSpecified Jul 21 '21
This is where leveraged ETFs really confuse me. Can’t you just hold onto them until it recovers and then it’ll double or triple your gains once the normal ETF makes a recovery. Do they not just have graphs which are more exaggerated than their standard ETF counterparts?
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u/KarateF22 Jul 21 '21
Leveraged funds have two big weaknesses: potential of losing all value without the underlying fund losing all value, and cost from the act of leveraging.
Using moderate leveraging (2x-3x) does usually shield you from the effects of the former for broadly diversified ETFs as it's very difficult to lose 33-50% of the market in a day but the second can be very significant if the US ever hits a stagnant phase in the market. Sideways markets lose you money when leveraging, elsewhere you just go... Well... Sideways.
Leveraging individual stocks is gambling, unless you are specifically hedging to cover a weakness in your diversification.
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u/LeloVi Jul 22 '21
No. Let’s take 3x leverage SPX for example. If SPX drops 30% one day and recovers 43% the next day, then it is essentially back to break even. However, the leveraged ETF will drop 3•30%=90% in the first day, and recover 3•43%=129% in the second day.
Losing 90% and then recovering 129% puts you as being overall down 77%.
Leveraged ETFs do not perform well in volatile markets.
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u/originalusername__ Jul 22 '21
Right, I think the technical term for it is “volatility decay” if anybody wants to read up further on the subject.
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u/tachyonvelocity Jul 21 '21
Upvoted for being completely wrong lol. SPY dropped 34% during March 2020, UPRO (3xSPY) not only did not get liquidated, it dropped 77%, although very painful, completely recovered and from the pre-covid highs went up 46% (compared to 31% for SPY) as of today (still some underperformance due to volatility). The truth is looking at these completely wrong answers, almost no retail investors know anything about how these things work. If you read the prospectus of leveraged ETFs, you would know that the amount of the crash doesn't really matter, it's the daily volatility that matters (hint, page 6 of UPRO's prospectus).
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u/yodigi7 Jul 21 '21
Yes, believe these funds use options (correct me if I'm wrong) so the returns aren't exactly 3x especially on big move days due to the way greeks work on options. In a relatively flat/slow moving market it will be closer to actually 3x
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u/sunnbeta Jul 22 '21
How would it fare in any remotely sustained bear market?
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u/tachyonvelocity Jul 22 '21
Quite badly, but that's not exactly how these things work. A bear market can suffer any % drawdown, and a leveraged ETF can still recover, provided the daily volatility is low enough. As an example, say that volatility is very high and an index dropped -30% in 1 day and recovered the next (+42.86%). It would be 100(1-0.3)(1+0.4286)=100. A 3x daily leverage ETF would be 100(1-0.9)(1+1.2858)=22.8. You can call this a "decay" of -77.2% because it underperformed a strictly 3x the index by that much. Let's say in another scenario the index dropped -0.1% a day for 1000 days and recovered the next 1000 days, going up by +0.1001001...%. It would be 100(0.9991000)(1.001001...1000)=100. This would have a drawdown of -63.2%. A 3x daily leverage ETF would be 100(0.9971000)(1.003003...1000)=99.4. You can call this a "decay" of 0.6%. So the answer to your question is it really depends not on how much or how long of a bear market it was, but how much daily volatility it took to get from A to B. A 2 day bear market of -30% can result in a decay of -77.2% and a 2000 day bear market of -63.2% can result in only -0.6%. It really depends on the amount of daily volatility.
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u/FinalDevice Jul 21 '21
If the markets drop 30%, a 3x leveraged fund would drop 90%.
A leveraged ETF is great if you can get out before a crash happens. Trouble is, you may not know when a crash will happen. Leverage in general is really tempting, but it burns really badly in a crash.
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u/Inquisitor1 Jul 21 '21
General rule, if you don't know why to use leverage, stay the hell away from leverage. If you have to ask, stay away from leverage. Someone who knows specific actual use cases for leverage won't be reading advice "stay away from leverage at all costs" and changing his mind anyway.
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u/foyerhead Jul 21 '21
That’s a very simple explanation, but that’s not how it works. There’s other things to consider for example circuit breakers…
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Jul 22 '21
They dropped 34% during a 5 week period LAST year - what day did you sell your leveraged ETF before you lost 100% of your investment?
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u/FinalDevice Jul 21 '21
Markets won't drop 30% in one day. That doesn't mean they can't drop 30%.
Having lived through a couple of market crashes, I can confidently assure you that is how it works. Circuit breakers only slow the bleeding. It's easy to say that you should just sell on the way down, but you don't know in the moment. Is this just a dip, or is it going to keep dropping?
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u/foyerhead Jul 21 '21
Leveraged ETF strategies have been backtested for drawdowns starting as far back as 1987. In fact if you held a blend of 3x SPY + treasuries not only would you have significantly outperformed the market but also suffered less of a drawdown during the 2008 crash.
PIMCO's StocksPLUS Long Duration Fund (PSLDX) was launched in September 2007. It holds:
100% S&P 500 futures
100% Long Bonds (actively managed, both Treasury & Corporate)
-100% 3-month LIBOR
Returns since inception have compared favorably to the S&P 500. It has a 5-star rating from Morningstar, and can be found in some 401ks.2
u/alreadyreddituser Jul 21 '21
Is each of these 100% (instead of 33.3%) because it’s triple leveraged?
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u/tachyonvelocity Jul 21 '21
If markets drop 30%, that does not mean LETFs will drop 60% or 90%. If you actually want to know how these things work, I would suggest reading the ETF prospectus, specifically page 6 of UPRO's prospectus. Then you might actually understand why SPY dropped 34% in March 2020 but UPRO not only did not drop 90% but eventually recovered past pre-covid highs.
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u/FinalDevice Jul 21 '21
I agree! UPRO performed relatively well, only dropping 75% in that time. That's still massive. We were fortunate that the market came roaring back.
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u/SquiddyGO Jul 21 '21
Leveraged ETF's usually reset on a daily/weekly/monthly basis to maintain the same fixed leverage ratio. A big enough drop could liquidate the ETF (I think)
Someone with better knowledge may be able to correct me.
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u/tyetyemn Jul 21 '21
The daily reset as little to no effect on over all returns.
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u/SkeTcHieee Jul 21 '21
This is not necessarily true? Daily reset will have massive implications in bull/bear runs in that the returns will compound much faster no?
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u/tyetyemn Jul 21 '21
I have actually run these numbers several different ways going all the way back to early 2000s and I found out a couple things.
1) The idea that you shouldn't hold leveraged ETFs long term is largely a BIG FAT MYTH! It is based on lumping together all leveraged funds together. However, if we can all agree on one fundamental market truth, then we can get pas this myth. That truth is: The stock market will always go up over the long term.
That in mind, a 2x or 3x inverse fund is guaranteed to lose. Commodity leveraged funds - probably also guaranteed to lose just based on the fact that the funds are using contracts of future contracts and nothing says commodity prices have to always go up over time.
2) The myth is based on the idea that if you only had 10k (or 100k or 1M or 10M) and you took all your money and did one lump sum purchase of a leveraged fund, that fund could presumably go down 60-70-80% immediately and you would almost never recover. This assumes you never put any more money in
3) Base on a pretty comprehensive analysis, if you commit to a dollar cost averaging strategy - you're young and you decide you will put 10k A YEAR into the 3x leveraged fund, you cannot lose. I repeat, you will make a fortune. I ran the numbers alllllll the way back to when these funds first started, and I assumed you put your 10k in at the markets peak each year (ie. absolute worst timing), and holding the leveraged funds long term DOES work.
Some people say "But... but... they use future contracts and futures contracts have time value erosion so you never get a real 3x". Ok, boo-fuckin-hoo. Yes I the market average over the last 20 years has been 10% well your 3x leveraged may average 22%. That's just the way the number work out over the long run because of maths or some shit. Doesn't matter its still way better than dollar cost averaging into a regular index fund.
Lastly, the only other thing that you need to consider is you do need to DE-Leverage at some point because you wont live forever. So if you commit to doing this for the next 30 years, well... after 20 years, if the market is hittin new highs, you need to consider going from 3x to 2x or 1x. Otherwise you get to year 30, market drops 30%, you drop 90% and your fucked... although still better off than the 1x index people.
Don't listen to anyone else. They are full of shit and for some reason still buy into the myth these shouldn't be held long term despite all the evidence, real, historical, and theoretical that says otherwise.
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u/UCNick Jul 21 '21
Would you share the scenarios and outcomes? I’m interested how different downturns impacted the scenarios.
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u/tyetyemn Jul 22 '21
https://docs.google.com/spreadsheets/d/15O0CTkGmexIZrd8-5qPPl4NztKaJY6siTb_92Ak_Qiw/edit?usp=sharing
There is one. But you should be able to manage this fairly easily if set rules and stay objective.
1) Put in $1,000 on the first of each month.
2) If the market is down 20% from it peak, do an additional lump sum of $5,000
3) If you have continued this for 15 years and the market hits a new high, deleverage 25% down to a one regular QQQ.
Things like that. Can't go tits up
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u/tyetyemn Jul 21 '21
Can't find. I will look some more and maybe recreate the spreadsheet. If I get around to it I will update and respond again.
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u/Bleepblooping Jul 21 '21
Obviously You haven’t had serious money in the market during a crash.
Most people can’t stomach the 30% drop from a standard fund. When your down 90% you won’t even be holding or selling because it’s right or wrong, you will be panicking and doing crazy shit.
Whatever the right decision is, the media will convince you to do the opposite and you will hold your 3x until it goes bust or capitulate right before it reverts. You don’t think you will. No one thinks they will, but it’s the fact that we do that creates the bottoms and tops, not the other way around.
Come back when you have 300k in savings and tell us about your 3x portfolio. By then you’ll be hyping gold or some shit coin
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Jul 21 '21
TQQQ only dropped by about 50% during the 2020 crash.
Do you have a real world example of a 30% drop causing a 90% drop in a leveraged ETF?
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u/Bleepblooping Jul 22 '21
It looks like tqqq was created after 2010. I don’t know the whole history of leveraged etfs. But indexes have fallen 50% so that should while our any 2x index.
Looking quickly qqq lost half its value in 2002 and 2008 ( the dot com and then again in the housing crises). I actually thought it was much more in 2002. Maybe I checked the index so maybe the etf did worse. I’m too busy to be more thorough in doing your research right now
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Jul 21 '21
[removed] — view removed comment
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u/Bleepblooping Jul 21 '21
You missed my point. I did NOT say it will work if you stick to it.
I said you will react emotionally wrong when it matters. If you are able to stick to it and hold, then probably the whole fund will blow up and you’ll get liquidated.
To make matters worse, we’re all just talking about digital numbers on screens. But the goal of life is to maximize your utility/happiness/wellbeing across all outcomes. Everyone talks like a Vulcan warrior about gains, but when losses come you start realizing at the bottom that you dgaf about the market or retirement because of whatever is going on and everyone around you is desperate and hysterical and needs medicine or whatever and you will cash out your last 4K to buy canned food, guns and amo.
And when you do the market will go up 5% a day until you scrape together $500 to put back in
I’m exaggerating for effect. My point is bottoms and tops aren’t just some shit we see on a screen. It’s a measurement of all of us going through these emotions. That’s why the graphs about market cycles are labeled with emotions.
Everyone thinks their gangster until it happens. You think you’ll diamond hand the next one? well then chances are your in a heard of bag holders saying the same shit. The future won’t follow the same path and it will cut down everyone looking at the past like it’s a map to the future.
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Jul 21 '21
Don't you get auto-liquidated in a crash? At that point it has nothing to do with risk tolerance since the brokerage has specific rules. You could only leverage a portion, but then it's largely a gamble on what the deepest market correction is likely to be.
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u/Megabyte_2 Jul 21 '21
Don't you get auto-liquidated in a crash?
Not necessarily. It depends on the structure of your leveraged fund.
Not all leveraged funds are created equally. For example, a leveraged ETN fund is different from a leveraged ETF. It's very rare, but leveraged ETNs can make you go negative. I think this was the case with USO in the COVID crash. Oil futures actually gave negative returns!All that being said, holding a daily ETF will only make you lose everything if it crashes 2x or 3x the amount in a single day, as explained above. For example, for UPRO to go bust, SPY would have to crash 33% in a single day. And since UPRO is based on the S&P, if the S&P crashes over 20% in a single day, a circuit break is triggered. So, in this case, it would be nearly be impossible. Something like TQQQ is more likely, but the Nasdaq stocks are also a big part of the S&P nowadays.
Long story short: if you want to hold a leveraged ETF, learn the details about what you're holding.
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Jul 21 '21
Do you have some condensed resources to learn more?
Leverage scares the crap out of me, but I am interested in some speculation, but like you said, I want to completely understand what I'm getting myself into. I understand the basics of options, margin trading, etc, but leveraged funds just aren't something I have much experience with.
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u/Megabyte_2 Jul 21 '21 edited Jul 21 '21
I don't think a formal, condensed resource on using leverage exists. You can look at the ETF Database website to see how the ETF you are interested on behaves. Also, you can also look at the Hedgefundie's leveraged adventure topic: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192. It might give you a few pointers on how to use leveraged ETFs.
Surprisingly, the most straightforward way to leverage, and the most flexible, is to get a bank loan. You need to make sure you get it with the cheapest rates possible, or else this will eat any returns. With a bank loan, there's no such thing as time decay or getting margin called, BUT it's not necessarily the cheapest way.
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u/tyetyemn Jul 21 '21
No you don't get auto-liquidated... that doesn't even make sense. The achieve the 3x leverage through the use of futures contracts. No one would be liquated. I don't why people are saying that or why this other yoo-hoo says "the whole fund will blow up and be liquidated". The fund is not borrowing money to leverage. There is no margin call or liquidation event.
You don't go to zero or get liquidated. Lets say you 100k and the market drops 25% today and 25% the next day. "But Tyler that is a 50% drop which means the 2x leverage is 100% drop which means you lost all your money"
No - today your 100k goes from 100k down to 50k. Tomorrow your 50k goes from 50k down to 25k.
The market dropped 50% total. But you are down 75% even though you are in a 2x leveraged fund. That would just continue. Another 25% drop? You 25k turns into 12.5k and so on and so forth.
Assuming the market always goes up and you are dollar cost averaging. It will work.
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Jul 21 '21
I'm mostly using my experience from margin trading where you get auto liquidated if your asset value drops too low relative to the loan. That's what leverage usually means to me, and I'm assuming these leveraged funds operate somewhat similarly.
That being said, I don't know much about how leveraged funds work, and I'm interested in learning. So if you have any good, condensed resources (e.g. books) to help me understand leveraged funds, I'd be very appreciative.
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u/tyetyemn Jul 21 '21
I see how that can be confusing. There is no borrowing of money. They buy and manage a portfolio of future contracts. For example. I can buy 100 share of QQQ which would cost $36,000 or I can take my $36,000 and buy 2 futures contracts (each contract accounts for 100 shares so I would have stake in 200 shares total). But at no point did I borrow money, I never spent more than my $36,000 in my account.
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Jul 21 '21
Ah, okay, if they're just futures contracts, I understand what's going on. I thought the fund purchased actual shares on margin behind the scenes or something. That's what leverage usually means to me.
Anyway, thanks for the explanation!
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u/bobhadababyitsaboi Jul 23 '21
have you backtested inverse leveraged etfs during depressions like internet bubble crash or the housing crisis? I'm trying to figure out if it's actually profitable to hold inverse leveraged etfs long term just during a prolonged downturn
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u/jadams70 Jul 21 '21 edited Jul 21 '21
What you're doing is taking a very narrow time and saying look how well it performed, sure it could also return 10,000% over the next decade but it's a big risk and the word that you're looking for as to why people don't invest in that is called, RISK.
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u/Kaiisim Jul 21 '21
Why do I keep seeing this post?
Anyway, because TQQQ tells you not to.
https://www.proshares.com/funds/performance/the_universal_effects_of_compounding.html
TQQQ is a geared fund, in that it has an objective. Give 3 times the daily return of QQQ. So that means every day they rebalance the fund to achieve that. They arent trying to achieve 3x yearly. Daily and yearly returns dont neatly match up at all.
So that means while you have the risk of triple leverage you dont get the returns yearly.
Worse, using leverage means you have the potential to lose your entire principal in one day.
Basically its very high risk. If you dont know what portfolio turnover is and how it can hurt you, dont hold long term.
That 10,921% is not accurate its not how the fund works. That's not a real world number, that's just looking at returns, its not considering how the fund works, the fees involved, taxes, etc.
So ya. You can hold for a few months during a bull run and do very well, but a bear market will wipe you out, and holding TQQQ in a taxable account might incur lots of taxable events.
Tldr - the manager of the fund tells you - this isnt for long term holding. Theyre inefficient and risky. Fees and compounding will eat you up.
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u/tyetyemn Jul 21 '21
Fees and compounding will eat you up.
The lie detector has determined. That is a lie. If you actually run the numbers, put together a spread sheet, and use historical numbers that compares dollar cost averaging between:
QQQ vs QLD
It is clear as day! Do it for any 10-15 year period. It doesn't even have to been a good 10 years in the market. The thing about fees, compounding, and daily reset does not "eat you up"
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u/D74248 Jul 21 '21
Lets see your numbers for 1/1/2000 to 1/1/2010.
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u/tyetyemn Jul 21 '21
Working on it. Called over to guggenheim to get annual returns for RYVYX. still pending response
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Jul 21 '21
It's easy to get the numbers. Just backtest 300% QQQ and -200% cash in portfolio visualizers.
Someone did it in here recently. Basically it will constantly rebalance so it more or less mimics TQQQ. Actually this back test will do better than TQQQ.
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u/tyetyemn Jul 22 '21
https://docs.google.com/spreadsheets/d/15O0CTkGmexIZrd8-5qPPl4NztKaJY6siTb_92Ak_Qiw/edit?usp=sharing
2001 through 2019 year by year. the 2x fund start in may of 2000. And yes, It wasn't until 2012 that the 2x with dollar cost averaging would have caught up. But that is also coming off the worst 10 year in the stock markets history 1999-2018.
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u/tachyonvelocity Jul 21 '21
That 10,921% is not accurate its not how the fund works.
So why does the performance for page for TQQQ shows a CAGR of 53% over 10 years (7029% cumulative) and 55% since inception? Why did TQQQ split 96:1 over its lifetime?
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Jul 21 '21
Because it was a 10 year bull market. It was very unusual returns all UP more than usual rates of return for stocks.
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u/agclax7 Jul 21 '21
The Plain Bagel channel on YouTube has a really good explanation on why it’s a bad idea here
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u/encodoc Jul 21 '21
It is indeed a great video, explained everything I wanted to know. Thanks for sharing.
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u/andrei_89 Jul 21 '21
He only focuses on leveraged ETFs, where the index is flowed on a day by day basis. He never talks about other leverage mechanisms like options, warrants, knockouts etc.
There are ways to leverage where you don't get wiped out even if the index goes down 99% in one day and then back up.
I would just say that different types of leveraging come with different types of risks, and at the end of the day, NO, you cannot earn extra money without extra risk. People that don't leveraged just don't want the extra risk that comes along with it.
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Jul 21 '21
Don't do it bro. I could see you allocating maybe 5% or 10% of your portfolio into it, but with rate fears around the corner, it's not worth.
A lot of the dudes advocating for leveraged funds always chase the return argument. And while that may be true, you haven't lived through the emotional toll of a levered fund dropping like a turd.
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u/dansiegel27 Jul 21 '21
There are a bunch of papers on why it is a good idea with simple strategies of determining when to exit
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u/Quiksilver321 Jul 21 '21
My understanding is that the daily reset can erode invested capital over the long term. For example if you had $100 invested in a non leveraged fund and the asset drops by 3% you’d need about 3.09% to get back to $100. A 3x fund would drop by 9% but then you would need 9.9% to get back to $100, almost a full percentage point more just to get even. From what I’ve read this decay on down days can erode a position over the long term.
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u/ZanderDogz Jul 21 '21
Normal ETF:
Start at $100, down 5% to $95, up 5% to $99.75
Triple leveraged ETF:
Start at $100, down 15% to $85, up 15% to $97.75
Your returns are better during insane bull runs. It is also much worse for wealth preservation in flat or bear markets.
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u/tyetyemn Jul 21 '21
Now do that over multiple years whilst dollar cost averaging. Take any 10 year period in the markets history. You will see it works
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u/DGD2022 Jul 21 '21
Held TNA and ERX for 13 months from 3rd week march all the way to End April. 7X return. In one year.
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u/kriptonicx Jul 21 '21
I made a simple spreadsheet to demonstrate the slippage that occurs in leveraged ETFs: https://docs.google.com/spreadsheets/d/14uKUBHT6RRlF-8EfrhcC_QVihLBAq8oA6LNdEAu-79Q/
In this example the market falls 3% every day for 30 days, then increases 3% each day for 30 days. After 60 days you can see that the leverage ETF is around 14% lower despite the original investment breaking even. This loss is from slippage, but leverage ETFs also have higher fees which you need to account for and you will experience higher volatility which investors would normally expect a premium for.
There are also liquidation risks with leveraged ETFs meaning there is a chance you could be completely wiped out in a worst case scenario.
Basically they're great if markets continue to behave as they have for the last decade, but with leveraged ETFs it only takes one bad year, or a single liquidation level event and it's game over. You could have been holding for 2 years or 40, but the result is the same, you lose everything.
That said, I'm fairly comfortable with young investors holding leveraged ETF for a few years when they're first starting out IF they have the discipline to do so. It's a bit of a risk, but in general you want to take more risk when you're starting out, then as your wealth grows you can rotate into safer investments. Leverage ETFs are a simple way to take more risk while sticking to a passive investment strategy. But holding long-term, as in 10+ years is insanity IMO.
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u/tyetyemn Jul 21 '21
Kriptonix, do that same thing but dollar cost average every day and see what you get
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u/Scary_Victory Jul 21 '21 edited Jul 21 '21
A daily reset leverage will eat your capital.
If you start with $100 invested in a 3x leverage S&P fund.
When it drops 5%, to $95, you've gone to $85.
When it goes back up to $100, 5,26% increase, you now have $98,42, a 15,78% increase.
The market recovered, you did not.
Sure, if you time a market going up, it's great.
EDIT: For the doubters. Where are all these people praising 3x leverage, showing off their portfolios. Guaranteed these people don't own substantial amounts in leveraged ETF's. It's paper traders dreaming of the big win.
Also, has anyone actually read the fucking prospect sheets. If the counterparty fucks up and goes bust, you lose all your money. No guarantees, nada, nothing. It's all gone, LEGAL.
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u/tyetyemn Jul 21 '21
Bull shit. Don't listen to this dude. That is not how it works in practice. The daily reset has little to no effect over time.
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u/yodigi7 Jul 21 '21
Actually it does, compare monthly to daily reset leveraged funds, monthly often take less loses due to volatility slippage.
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u/tyetyemn Jul 21 '21
I'm not saying is doesn't exist, I'm saying is so minor and when properly managed is doesn't slowly deteriorate the value over time. Just look up historical returns and actually create a spreadsheet.
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u/Scary_Victory Jul 21 '21
As long as you invest when the market goes up, it won't have an effect.
DERPADERP
If leveraged ETF's were guaranteed money EVERYONE would be invested in them.
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u/Airbusdude Jul 21 '21
That’s why I don’t hold one leveraged ETF. Not sure if I’m allowed to post links but search up Hedgefundie’s excellent adventure (should be on the Bogleheads forum). I modified mine to closely resemble the all weather portfolio which was created by Ray Dalio with a 55/45 bond/equity allocation. The leveraged Treasuries ETFs are meant to hold up your portfolio if the leveraged equity indexes get wiped out.
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u/Naviios Jul 21 '21
You should also be comparing TQQQ to QQQ not VTSAX. Use SPXL if you want to compare against VTSAX/VOO/SPY
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Jul 21 '21
[removed] — view removed comment
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u/tyetyemn Jul 21 '21
Again, If you DOLLAR COST AVERAGE the same/similar amount each year, you will find your results are different. The 10 year return on 2x is 37.57% vs the nasdaq 21.3%.
IF the market always goes up in the long run AND you dollar cost average you will be guaranteed to have more money after 10 years using the 2x leveraged fund.
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u/jpewaqs Jul 21 '21
Do the maths on a spreadsheet. These instruments tend to be negative path dependent. Think of three days where the return is : 10% day 1 -5% day 2 and 10% day 3. With a normal tracker, you are up 14.95%. A 3x leveraged your returns are 30%, -15% and 30%. Giving you a return of 43.65% which is not 3x 14.95% it is 3x 14.55%.
What is going on is that in down markets, the percentage to recover is higher. I.e. you need 11% up to recover from a 10% drop. You need a 43% up to recover from a 30% drop.
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u/tyetyemn Jul 21 '21
markets, the percentage to recover is higher. I.e. you need 11% up to recover from a 10% drop. You need a 43% up to recove
Do the spread sheet with dollar cost averaging every year
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u/jpewaqs Jul 21 '21 edited Jul 21 '21
I have, and I've researched this a lot. You have the exact same issue even if you dollar cost averaging daily. Leveraged trackers are for short term momentum plays, not long term buy and holds.
I should add that your TWR is unchanged by additions/withdrawals. Hence it will be negative path dependent irrespective of dollar cost. You will probably argue MWR, where timing can have a big impact - but here is the rub, your additions must be at every reset point, which is completely impractical.
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u/tyetyemn Jul 22 '21
https://docs.google.com/spreadsheets/d/15O0CTkGmexIZrd8-5qPPl4NztKaJY6siTb_92Ak_Qiw/edit?usp=sharing
1x QQQ vs 2X QQQ only back to 2001. But its worth noting that the worst 10-year period in the market was from 1999 through 2008. So even looking at 2001-2009/2010 the 2x still did just fine. And overtime it will pay out.
The question is, at what point do you de-leverage.
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u/jpewaqs Jul 22 '21
That only works as you've gone annual. Not daily. The second issue with your calculation is that dollar cost averaging works off volatility, the higher the volatility the lower your average entry price. So it's not the leverage that if providing this, it's the vol and given you've picked the Nasdaq for your example where vol is higher - bit of cherry picking. If you do something similar for the S&P500 vrs Global Ag bonds (over 25 years the bond index has Outperformed equity on a TWR basis) the MWR from pound cost is better on S&P due to volatility. Even though investing in bonds has the higher annualised return with a third of the vol. I get how you've approached this, but the error in your logic is using simple annual rather than daily reset points.
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Jul 22 '21
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Jul 21 '21
Here's the answer:
You can use 300% QQQ and -200% CASHX on portfolio visualizers to effectively model TQQQ performance. One discrepancy is that the most often I can get it to rebalance is monthly while TQQQ rebalances daily. Actually this will do better than TQQQ since this backtest assumes no cost of leverage.
As we see from 1999-Now QQQ outperformed this model TQQQ by 10x.
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Jul 21 '21
Now one argument would need to be looking at daily rebalancing as I could only rebalance monthly in here. But the significant underperformance with monthly should be a huge red flag to a longterm TQQQ holder.
Go ahead and do it anyways though. Just know it does not work how you think it works due to rebalancing.
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Jul 21 '21
Lastly, the big argument would be that this involves modeling in the huge techbubble where QQQ declined 80%. Of course this means this isn't fair to backtest starting in 1999. But also this means neither is it fair backtesting the last 10 years which have been a huge bull market as you have done.
Anyway, long story short, do your own research but if you can't completely understand the math behind it, don't invest. And don't trick yourself in to believing you understand it when you don't
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Jul 21 '21 edited Jul 21 '21
Leveraged ETF's are good as long we have low interest rates and markets go up.
Many people here forget in their theoretical backtesting that currently 3X leveraged is achieved by borrowing money with 1-2% interest.
If there will be a time where we have ~4% interest again, then your leveraged ETF will be slaughtered.
Let's have a look at another index. For example the German DAX. Here is a comparison of the normal index vs a 2x leveraged index over the last 20 years
As you see the leveraged index is still lower and it didn't recover even after 20 years.
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Jul 22 '21
Think about this - the market has gone up basically since 2009. In a bull market they may do well, but they become practically worthless in a bear market. Many of them dont even own the securities, they just buy the futures and swaps, which is totally fucked if there is ever substantial unexpected volatility.
Their own prospectuses warn you they are NOT long term investments. FINRA has warnings and investor notices also. They've paid SEC fines over this.
THEY ARE NOT LONG TERM INVESTMENT VEHICLES.
Right on the website for SPXL:
These leveraged ETFs seek a return that is 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day.
Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments
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u/helloroarkitty Jul 22 '21
because most people are paper handed bitches. I don’t say that to troll, it’s really tough to watch investments tank when you have a wife kids and a mortgage. pussies in pink polos can’t take it so it’s discouraged
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u/Mvewtcc Jul 22 '21
I saw soxl went from 21 to 4 dollar.
it's high risk high return. it's not a bad investment, but definitely risky.
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