Leveraged ETFs /UPRO, etc./

Dear All,

I recently found the world of leveraged ETFs and I’d like to share my findings with you. It looks promising (and very risky), but worth to reserve some money for it. My selection is UPRO and I’m thinking on to spend 5% of my capital to buy and hold some.

Here’s a nice analysis of benefits and risk. Maybe others are interested:

https://seekingalpha.com/instablog/30945655-dane-van-domelen/3772386-buy-and-hold-s-and-p-500-bull-3x-etfs-e-g-upro-high-risk-massive-returns

This ATH time is not the best moment to invest into UPRO, but it will stay on my radar.

Regards,
Lexandro

2 Likes

While I love the topic of leveraging beware of how compounding works against leveraged ETFs in downward markets over time as they usually RE-balance daily! The performance is asymmetric and ongoing volatility destroys your returns. If you have sufficient assets in your bank, rather ask for lombard facilities and control this issue on your side than to entrust it a badly designed product that can destroy more $$$ as it should as most leveraged ETFs:
1] https://www.cfainstitute.org/learning/products/publications/contributed/performance/Documents/leveraged_etfs_rf_op.pdf
2] https://thecollegeinvestor.com/4414/leveraged-etfs-dont-match-market-performance/
Applying leverage can generate extremely interesting portfolios with asset allocations and risk/ return allocations which you couldn’t get otherwise.

I’d recommend to avoid them. The odds are stacked against you. Let’s say the index drops by 10% - you lose 30%, and now you need to gain 42.8% to recover. If the index just goes back to where it started, it won’t be enough, you’ll still have a loss of about 7%.

And if it drops by 30+% you’re done

I know its risky that’s why I invest only 5%, but on the other side I never saw 30% drop in S&P 500 and on the long run (not seeing 2-3-4 days moves) it has significant benefit. At the beginning I decided it invest 10% of my savings into risky/interesting assets (leveraged etf, cryptocurrency, startups, etc…)

But I fully agree with you. Everyone must be very careful with this and shouldn’t invest into it without proper understanding and risk taking habit.

If you assume that the stock market in a whole always increases in the long run and you don’t care if you need to wait, I am sure some financial instruments allow to benefit from that. Maybe American call ? For sure, leverage ETF could be an idea. Monthly leverage ETF seems less risky.

The result of an ETF: S&P500 leverage 3x rebalanced every 10 years would be incredible (assuming a reasonable TER )

Also have a look at this article: https://seekingalpha.com/article/3121916-2x-daily-vs-2x-monthly-s-and-p-500-etfs-and-sso-vs-dxslx-updated?page=2

Can someone explain to me why does rebalancing affect leverage? Leverage is like a loan. Even if they don’t rebalance daily, I’m sure they will check if your position is still positive?