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.
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).
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?
Well, I sure hope so 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?
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.
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.
I’ve also reached the conclusion that I should use non-zero leverage, and MES futures look like the best option to achieve leverage. Does anyone have experience with buying-and-holding (quarterly rolling) MES futures, and not being classified as a professional investor by tax authorities?
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 .
Well, to make things clear from my side, I am not investing in UPRO only, it is just one piece of portfolio that provides the leverage to my desired level. SSO and UPRO have almost identical TER, so with UPRO I get more bang for my money.
Not exactly. The question they pose is which leverage is optimal, which is a genuinely interesting “research” question. Thank you for the info, for me it means that my 1.5 leveraging of the part of the total portfolio doesn’t look like excessive.
But then they seem to pretend that if the optimal leverage is 2, then you should invest in SSO only. And this is the part I challenge. Let’s say you decided to go with 2x leveraged S&P 500. You have at least 2 options
100% SSO, TER 0.92%
50% UPRO, 50% VOO, TER 0.5%.
Well, you know which forum you are in . Considering that 3x is the maximum leverage allowed for US ETFs, second allocation is probably the most cost effective possible one.
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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.