Just seeing this thread and we've gone through this leveraged ETF discussion several times over the years with various clients (institutional and HNW). The slippage and decay caused by the daily reset makes these investments become a loser over time from the long side and its way to volatile on the short side. Its just a math problem... However we knew of a hedge fund, maybe a decade ago or so now, whose entire strategy was to go long the 3X and short the 2X (or maybe it was reverse) and pick up the spread on the decay. Pretty smart strategy and the fund did well. Also it didn't require much leverage until the clearinghouses caught wind and increased margin requirements for levered ETFs on both the long and short side. Increasing the margin requirements wound up taking a lot of the juice out of the trade.

PDEMDHC said:

---

Time to ultrashort?

---

There is always SQQQ, SPXU, etc. if one were so inclined.

HustlerAggie said:

---

DEFINITELY not for the faint of heart. You are essentially taking the existing index funds and just ratcheting up the volatility/risk on them. Long term, this is shown to work, but if there is a drop before you have a chance to appreciate much, you are in a world of hurt.

Also, it is more likely to lose everything with these funds if you don't hedge at all. (i.e. my TMF hedge went up as the leveraged-index funds went down last week.)

---

Well, you won't lose everything, it'll just seem like it.

TMF and UGLD continue to save my bacon.

My current blend in my leveraged experiment is TQQQ (~15%), UTSL (~20%), DRN (~15%), TMF (~40%), UGLD (~10%). Of the 5, only TQQQ is down today.

I will add though that things have been moving so quickly it's really hard to keep a proper balance and not have a Good Faith Violation. Might be a better idea to just pull out when the market is so chaotic.

tysker said:

---

The slippage and decay caused by the daily reset makes these investments become a loser over time from the long side and its way to volatile on the short side. Its just a math problem...

---

This is what so many don't understand.

T.
M.
F.

deadbq03 said:

---

T.
M.
F.

---

The reason my portfolio is up for today.

HustlerAggie said:

---

deadbq03 said:

---

T.
M.
F.

---

The reason my portfolio is up for today.

---

TMF is +123% in my Excellent Adventure account.

UPRO a cool -39%.

Portfolio: +26%. I started in October of last year.

RangerRick9211 said:

---

HustlerAggie said:

---

deadbq03 said:

---

T.
M.
F.

---

The reason my portfolio is up for today.

---

TMF is +123% in my Excellent Adventure account.

UPRO a cool -39%.

Portfolio: +26%. I started in October of last year.

---

Great to hear!

People often discount the "bond" (TMF) component and only want to focus on the shiny equity plays (TQQQ, TECL, UDOW, UPRO, etc.) but the last month has shown why that is not smart.

As long as we note that TMF has a shelf life tied to rates. If the regime changes, so does our Excellent Adventure to TMV.

Why don't you trade futures or long dated options and forget about the levered ETFs?

RangerRick9211 said:

---

As long as we note that TMF has a shelf life tied to rates. If the regime changes, so does our Excellent Adventure to TMV.

---

Is sentiment on treasuries really tied that much to rates? Seems like as long as they beat the mayonnaise jar they'll always be a relief valve during downturns.

dantes said:

---

Why don't you trade futures or long dated options and forget about the levered ETFs?

---

As I understand it, you really aren't allowed to do that in IRA accounts, but levered ETFs are allowed.

Also, levered funds are much easier to understand for the regular investor than futures.

Edit: Also you can get into and out of ETFs much more quickly than futures contracts, which if you are trading on risk-parity (inverse-volatility, etc.), then that is important.

Another edit: Also, if I am using things like Portfolio Visualizer or ETF Replay or whatever to build a trading/timing model, I don't know how to plug in futures to do that, only ETFs. (Probably just because I am too dumb to figure it out, but still.)

HustlerAggie said:

---

dantes said:

---

Why don't you trade futures or long dated options and forget about the levered ETFs?

---

As I understand it, you really aren't allowed to do that in IRA accounts, but levered ETFs are allowed.

Also, levered funds are much easier to understand for the regular investor than futures.

Edit: Also you can get into and out of ETFs much more quickly than futures contracts, which if you are trading on risk-parity (inverse-volatility, etc.), then that is important.

Another edit: Also, if I am using things like Portfolio Visualizer or ETF Replay or whatever to build a trading/timing model, I don't know how to plug in futures to do that, only ETFs. (Probably just because I am too dumb to figure it out, but still.)

---

I agree on all counts; I'm doing this in my Roth.

However, long-dated options are allowed in IRAs though and they're an intriguing idea. I'm researching such a strategy right now. I like the fact that transactions settle next day... with the market as volatile as it is right now, it's hard to keep the balance I want with ETFs on a 3 day clock.

You guys are working these levered etfs in your qualified accounts? Bold strategy cotton

Well, common wisdom is that the riskiest investments go into the Roth accounts for tax purposes.

Thoughts? On Jan 11, 2020, SSO (S&P500 2x leveraged fund) closed around $155. Today, it closed at $107. It's down around 31%.

SPY (std S&P500 etf) closed around $327 on Jan 11. Today, it closed at $274. Down around 16.4%.

Not saying its a bad or good move to be in leveraged etfs. Just understand what you're in and the risks involved.

feel like a genius for my for fun SPXU gamble two weeks ago. Profit took on that today.

It's my only account that is green as a whole right now. TMF is keeping me afloat at the moment.

Chickened out today and pulled out. TMF is too volatile now. Good luck to those still playing.

I'll jump back in when the dust settles.

Sometime around mid Feb, 2020, SSO (S&P500 2x leveraged fund) closed around $165. Friday, it closed at $67. It's down around 60%.

SPY (std S&P500 etf) closed around $336 around the same time in Feb. This morning, it's around $224. Down around 30%.

Not saying its a bad or good move to be in leveraged etfs. Just understand what you're in and the risks involved.

These are getting hammered! May be a good time to jump in.

Sorry to hear that Tumble Weed. That hurts if you didn't hedge and those were an outsized portion of your portfolio.

I held SDOW and SQQQ for a few days during the drop and that paid off well, but it made me nervous and I had to get rid of them.

HustlerAggie said:

---

Sorry to hear that Tumble Weed. That hurts if you didn't hedge and those were an outsized portion of your portfolio.

I held SDOW and SQQQ for a few days during the drop and that paid off well, but it made me nervous and I had to get rid of them.

---

UDOW, UPRO, and TQQQ made up less than 10% of my overall stock holdings.

I think that it is important to post both our gains and losses to give an accurate picture. It will be interesting to bump this post over time with updated information. I am prepared for it to get worse before it gets better.

Guys I probably shouldnt be saying this but these leveraged etfs aren't buy and hold vehicles, they are trading vehicles. If you're holding on to them more than a couple of days your risk profile increases dramatically and you're still losing money on the reset/decay. In my experience you can really only make money if when you're initially very correct and ride the wave. (I think of it like those tests where you're given a harder question for every question you get correct and a less hard question for wrong answers. They bend the curve toward your final score and to get the highest possible outcome you need to correct a bunch right off the bat because if you're wrong on the first question, it's really, really hard to make up the difference.)

RangerRick9211 said:

---

I started way, way back in the olden days of 2010 with commodity leveraged funds, e.g. UGAZ, that were subject to complicated swaps and futures the resulted in backwardation and contango considerations.

And then I moved into VIX which is subject to volatility or mathematical decay.

I lose no sleep over UPRO. It's liquid and true to it's margin target.

---

Has your strategy done well over the 10 years?

The OG on the HEDGEFUNDIE threads (Hedgefundie himself) is saying that he is about exactly where he started after 1-year in his part 2 thread. (prior to today's gains) In other words, the run up and drop about exactly equaled over the last year. That's actually not too bad considering the drop so far and the fact he is poised for a run up at some point.

tysker said:

---

Guys I probably shouldnt be saying this but these leveraged etfs aren't buy and hold vehicles, they are trading vehicles. If you're holding on to them more than a couple of days your risk profile increases dramatically and you're still losing money on the reset/decay. In my experience you can really only make money if when you're initially very correct and ride the wave. (I think of it like those tests where you're given a harder question for every question you get correct and a less hard question for wrong answers. They bend the curve toward your final score and to get the highest possible outcome you need to correct a bunch right off the bat because if you're wrong on the first question, it's really, really hard to make up the difference.)

---

I agree that they should be traded frequently based on market conditions, but the buy-and-hold of a diversified leveraged portfolio actually isn't terrible.

Also, the decay isn't horrible. (If the decay was terrible, one could come in and use a shorting strategy for the inverse to profit from the decay.)

The decay is definitely overblown.

The contrived chart on Page 1 makes it look like there could be theoretically 10% decay in 2 months.

But let's look at specific real-world examples of sideways markets...

May 7 2019 (close) to Aug 6 2019. SPY closes basically the same (-0.05%). SPXL closes -2.16% down. 3 month period = 0.72% decay per month. IMO this pretty well represents a "normal" sideways market.

Let's expand the range to Mar 8 2019 to Mar 9 2020. A full year where SPY is flat (-0.08%); SPXL is -10.2%... 12 month period = 0.85% decay per month. Worse decay, but I'm not surprised given the massive drop.

Let's look at a V bottom situation. Sep 10 2018 to Apr 11 2019 SPY 0.04% gain, SPXL -5.75%. 7 month period = 0.82% decay per month.

I feel pretty confident that real world decay is never worse than 1% per month in a sideways market. I'm extremely confident that it's not as bad as the chart shows. It's sad that the chart is used as a common argument against leveraged ETFs, because while it's technically correct, it's unrealistic and misleading. Real markets don't behave like that when they are sideways.

And yes, math nerds, I know my "monthly" decay numbers aren't actually what the decay is per month. They're actually going to be less due to compounding I'm just too lazy to do math while I'm in a conference call I barely need to be in. In fact with compounding I bet all three examples are probably pretty close to being the same decay rate.

If someone else wants to calculate the compounded rate, by all means.

And yes thats generally true. The S&P doesnt normally have large daily swings. But lets examine the effects of a market like today.

Generic unleveraged fund
Closes at $100 yesterday
Closes at $90 today. 10% drop
2 days later, back to $100
Using equally weighted gains for the two days
$90 x (1 + 0.054)^2 = $100

Generic 2X leveraged fund Y
Closes at $100 yesterday
Closes at $80 today. 20% drop
Using equally weighted 2x gains for the two days
$80 x (1 + 2 x 0.054)^2 = $98.25

Down 1.75% over the three day window the regular fund is even.

The decay is a function of the volatility. These funds get eaten up during volatile periods.

So, yes, it works great in stable markets, the decay is minimal. But exactly when you are hurting most, during periods of high volatility, it takes it in the shorts even harder.

Just something to keep in mind.


Note, it's even worse if it takes just one day for the unleveraged fund to return to $100. The leveraged fund would be at $97.78, or 2.22% decay in one day.

And the effect is worse (or rather, is more prominent on even smaller bouts of volatility) for 3x funds.

S&P500
March 12 2480.64
March 19 2409.39

Down 2.9%

SSO (2x S&P ETF)
March 12 85.89
March 19 78.61

Down 8.5%

The volatility is brutal to these leveraged ETFs.

*all prices taken at the close per Yahoo finance