Why the huge drop in UPRO today? (~50%)
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@Dr.PI or other.
If the market drops down let’s 20-30% from ATH. Would you buy the e-mini s&p500 futures?
E.g. buy 5 slots at around 100k chf and ride it back up? Or do you think you can be wiped out before at 50x?
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I didn’t forget about your question, was just gathering experience, both technical and emotional. I am still not finished. But I can tell you that I would never take a position in futures more than 25% of what I have at IB. I am counting roughly with a sudden drop of portfolio value by 50%. In this case I am 50% of original value in stocks. Margin requirements are 50%, so I can still have a negative cash position equal to 25% of original value. With futures I am at roughly -12% in cash, so my positions are still alive.
It would be extremely stupid to wipe out my life’s savings in an occasional market dip and it would certainly have very serious personal consequences.
So with this constraint I can take only one micro S&P500 future. I was also thinking about a separate small portfolio with a high leverage, but - why would I take more risk for the same absolute exposure?
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I went heavy on 3x ETF (biotech, China and internet stocks) in mid March during the first leg down.
These 3x ETF are down another 50-60% since I purchased these. Ouch!
I don’t think we are near the bottom yet but I am disciplining DCA only at pay-day and not much more than that given uncertainty on when the rebound.
Nerves of steel!
Disclosure: I have an additional cash reserve but don’t want to deploy it now. Maybe I am little afraid we are not out of the tunnel yet
Because of the way they are functioning: buying more derivatives when prices go up and selling them and the collateral when prices go down. If instead you would buy futures or went on margin, you would be somewhere around 0 in USD and probably in profit in CHF.
I have not sold them. I think you would be still down if you buy on margin.
Just to be clear. As an example:
A) I entered biotech 3x when the underlying index (XBI) lost already 50% from ATH
B) then index lost another 15-20%, which roughly means another 50% on a 3x ETF
C) so my 3x ETF is down 50%
If I would have got futures or bought XBI on margin at point in time A (above). I would be still down, wouldn’t I?
For reference, let’s check facts UPRO (3x S&P500)
- if you invested in covid bottom, you would have made 7x your investment when reaching ATH again
- after the recent decline upro is still higher than pre-covid, albeit close
Ok sorry, I thought you are talking about standard indices. Still I think constant leverage ETFs are less efficient than self made leverage solutions.
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On the other thought, I should look closer at 3x or maybe 2x leveraged ETFs.
they are a scam and not worth it.
The value of those token will decrease over longer time frames, please for your NV avoid.
I believe you right! But let me elaborate some more on my experience and how can be helpful to others.
a) 3x ETF to be used only for short periods of time. I agree over long periods the probability of this vehicle to never reach prior peak is very real. It’s math, it always takes longer to go back up then going down on % basis
b) 3x ETF move wildly. Does not matter how much you looked the graphs. Once you are in, it’s a wild roller coaster
c) attention to cost. 3x ETF are derivatives as IR increase so could costs
When I think we could these
- short period of time
- use for a small part of your NW
- have a plan on when to enter / exit
- use after a downturn
- don’t get greedy
- don’t use if you are risk adverse
- don’t use if you have a short investment horizon (less than 5-7y)
- don’t use if you don’t understand well finance and have traded for at least 10 years
I can’t say I mastered all of these elements but I am still learning and improving on the go
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That’s a good point. 
With my current approach I could go for 1-2 years before hitting 2x with various further decreases.
Once I would hit that amount I would continue my monthly buying which should deleverage the position slightly.
Going further I am monitoring my maintenance margin a bit more to judge how high this would need to be in relation to the % of downturn.
In summary, I am starting my portfolio margin journey very carefully and am also very aware of negative stories (Markettimer in the boglehead forum. I just believe that for younger investors it’s an interesting concept (aka lifecycle investing).
Does someone know how this is treated tax wise? Is there a danger being classified as pro trader when investing in such an ETF? Also how about taxation, looked at a leveraged ETF from DB and it did not report any dividends in ictax - is there a danger of the entire return being taxed?
I know it’s a recurring and controversial subject, but I’ve been reading up on leveraged index investing strategies (e.g. Hedgefundie’s leveraged ETFs, margin, call options on globally diversified indices/ETFs) and was wondering if you Mustachians are using any?
What are your experiences / insights?
If not, could you imagine any situation where you would consider any (e.g. after a strong market correction >30%, after panic selling events…)?
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I use MES futures which I count as a part of US allocation. For now I keep it, but might reduce leveraging if the markets will be much higher than now.
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For fiscal reason leveraged product are a big NO for me. Leveraged products can be a reason to consider you as a professional investor and to consider your capital gain as income.
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I didn’t know this, that’s interesting. So the gains of a 3x leveraged s&p 500 ETF would be taxed?
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It is not exactly that gain on leveraged product would be taxed. In fact you have to comply with the five following rules to be considered as a non professional investor. If the answer is no to only one of the following points then you could be considered as a professional investor and all you capital gain would be taxable, even your long positions on the S&P 500.
- Private investors should hold securities for at least six months before selling them
- Capital gains of private investors do not account for more than 50 percent of their net income.
- The total volume of transactions (purchases and sales) of a private investor does not exceed five times the value of the investment portfolio at the beginning of the tax period.
- Private investors invest with their own money, not with loans
- Private investors do not use derivatives (in particular options) unless it is to hedge the risks of their securities
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In practice it always depends on the tax authorities, they decide whether you qualify as a professional investor on a case by case basis. E.g. if you buy a security and sell it 3 months later (violating rule 1) you are not automatically classified as a professional investor. There are for example a few people here in the forum that use margin loans for investing and are not qualified as professional investors.
That summary is imprecise. It’s also perfectly fine, from a tax perspective, to have a loan, as long as the interest you pay for the loan amounts to less than the taxable income from your investments (interest and dividends).
This formulation is not really correct either. If you comply with these five rules, you are guaranteed to be classified as non-professional investor. That may be a small but significant difference.
I recommend generally complying with these five rules but you shouldn’t be afraid of minor violations such as selling a small amount after less than 6 months. I’m also not concerned about the ‘capital gain less than 50% of net income’ rule after retirement with simple buy-and-hold investments.
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