Leveraged portfolios

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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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?

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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 :grin:.

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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 :grin:. Considering that 3x is the maximum leverage allowed for US ETFs, second allocation is probably the most cost effective possible one.

Have you considered NTSX?
Cheaper TER, notional exposure ~ 90/60 S&P500 Futures / Treasuries.

Probably a better bet in case of downturns :wink:

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I haven’t really checked the study, so may have missed critical methodology information, but yahoo finance usually doesn’t take dividends into account, they’re a price only database. The results of the study, which used them for data gathering, may (or may not) be affected by that.

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Great way to get leverage. Too bad there’s no NTSX combo with Swiss government bonds and MSCI World equity though :grin:

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There are NTSX, NTSI, and NTSE for US, ex-US, and EM, respectively. So getting some kind of world allocation should be easy.

Regarding government bonds I don’t know a clean and easy solution. Maybe hedge the bond portion to CHF manually?

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