I wanted to update my thoughts about leveraged portfolios. Now when we are again having access to US ETFs after losing it temporary, I think I shouldn’t wait longer.
Some time ago I was thinking how to increase the amount of cash that I effectively borrow by using leveraged instruments. I was first thinking about buying another MES future, but the borrowed amount and potential losses were getting too big to let them run loose and expect them to be absorbed by a margin loan. So I started to think how much cash with respect to the nominal contract value should I keep: 30%? 1/3 ? 40%? And when and how to add cash to the margin reserve. Then I realized that I am actually trying to replicate leveraged ETFs and decided to take a closer look at them.
The advantages of leveraged ETFs vs. futures are:
- Granularity and flexibility. You borrow 70-100 USD per share of UPRO (no fractional shares) and can fine tune your total leverage.
- No need to calculate and keep cash reserves. Invest the whole cash amount available and be done with it.
Comes with costs, of course, but I think it’s worth it.
As a side note, I realized quite some time ago that portfolio simulations almost always assume a portfolio with an initial investment amount that is left to run without adding any new funds in it. Understandably, this is the easiest way. However I and many forum members, are in the accumulation stage, which has own peculiarities.
I aim at a portfolio of US stocks that has 75% of non-leveraged funds and 25% UPRO with 3x leverage, providing a total leverage of 1.5 - in US stocks portfolio at IB only. I did some quick simulations how this portfolio would act in the past in the accumulation mode. And I was convinced by the results and I had implemented it.
Now that I have discovered that UPRO has options expiring every Friday I will think how and if can/should I use options to harvest some premium from them 
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