Leveraged portfolios

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.

  1. Private investors should hold securities for at least six months before selling them
  2. Capital gains of private investors do not account for more than 50 percent of their net income.
  3. 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.
  4. Private investors invest with their own money, not with loans
  5. 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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I guess leveraged ETFs wouldn’t count as derivatives for the tax man, although the ETFs themselfs use derivatives?

Leveraged ETFs are quite unlikely to get taxed compared to options.

I consider leveraged ETFs high risk like crypto or investing in startups. So only a small part of your portfolio should be invested in these ETFs.

I also believed that Hedgefundie’s strategy is an excellent strategy in the long run. It can bring big returns and big drawdowns, but a great shape ratio.
The main risk would be that the ETF value goes to 0 if the market loses -33% in a day (for 3x leveraged ETFs).

See https://www.etf.com/sections/features-and-news/inverse-vix-etn-shuts-down

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You may well be right. In practice very few people are considered professional investors in Switzerland. Usually if you comply with three of these five rules you should not be in trouble.

But be aware that it could be very difficult to argue with a government employee (or a head of service) who has decided that now the rules will be applied strictly!

I find this strategy incredibly fascinating in theory, and I’m saying this as a passive long term buy&hold global index investor. To my understanding, it’s practically Bogle on steroids. I’m not afraid of wild volatility as long as the strategy succeeds in the long run.

However, Bogleheads stress low cost as the main pillar of any investment. And that’s where I’m not so sure about Hedgefundie. Who knows how the costs of the underlying derivatives will evolve once the strategy gets more widely adapted? Maybe higher demand will lead to higher prices for the necessary derivatives?

Before other nice forum members start to repeat the same things again (I am not so nice and I don’t like repeating), here some relevant threads

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Actually, it’s very nice of you to list some relevant inputs, so thanks! I did indeed miss some of these, my apologies.

Still, I believe I haven’t found any thoughts on this:

Or, to put it differently: Backtesting alone won’t do the job.

Beyond Backtesting: The Historical Evidence Trap

Usually in ETFs it’s quite the opposite. The bigger they are, the lower the fees. It’s a virtuous circle of winner take’s all.

Well, I sure hope so :grin: Just wondering about the underlying derivatives (futures etc.). The more demand for them, the higher the prices get, I guess. Someone’s got to be the seller for all these buyers.

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?

There is also some other useful info about leveraging in that thread.

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There is some info:
https://www.cmegroup.com/trading/equity-index/report-a-cost-comparison-of-futures-and-etfs.html

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The universe of single-stock ETFs continues to grow with the GraniteShares 1.25x Long TSLA Daily ETF (TSL), GraniteShares 1x Short TSLA Daily ETF (NASDAQ:TSLI), GraniteShares 1.75x Long AAPL Daily ETF (AAPB) and the GraniteShares 1.5x Long COIN Daily ETF (CONL) all launching to track underlying shares of Tesla (TSLA), Apple (AAPL), and Coinbase Global (COIN). The ETFs are aimed at providing investors short or leveraged exposure to the daily price moves of the underlying stocks by using financial instruments such as swap agreements. Last month, AXS Investments launched eight single-stock ETFs. Stocks that have or will have soon have single-stock ETFs tracking them include Nike (NKE), Pfizer (PFE), Microsoft (MSFT), Netflix (NFLX), Boeing (BA), Wells Fargo (WFC), Salesforce (CRM), ConocoPhillips (COP), Paypal (PYPL) and NVIDIA (NVDA). SEC Commissioner Caroline Crenshaw has warned investment advisors against recommending the ETFs to retail investors. Looking ahead, analysts think the single-stock ETFs could add even more volatility around earnings and corporate events.

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Thanks for the info. Call me old school but I don’t see the point of single stock (inverse) leveraged ETFs, other than management fees, of course.

Are options and futures such complicated instruments that one can’t think to use them to get the desired effect? And if so, what business does one have using leverage to invest (leveraged ETFs require just as much research to be really understood than options or futures)?

Not even talking about margin loans, which are the easiest way to invest with leverage.

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