Leveraged portfolios

[Dr.PI]

QE/QT effect on equity portfolios

I checked myself if Ben Felix has some video on leverage, and guess what: he does: [Investing With Leverage (Borrowing to Invest, Leveraged ETFs)] For someone at the start of his investment career, it will increase return if you use leverage. So if you keep your margin cap at “1 year saving” I think you should be fine. Be sure to watch until the end for the warnings as well

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

[Dr.PI]

@johndoe1

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?

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

[Dr.PI]

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.

[Wolverine]

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.

[Zumsel]

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?

[Dr.PI]

What's your (investment) strategy for 2023?

Mandatory warning: I am taking risk, only take leverage if you have assessed yours, and never take more than you can handle. My solution works for me because, being at the early stages of accumulation, I can pony up collateral cash in amounts relatively consequent relative to the size of my leverage. I would probably be more cautious if I didn’t have this ability. Lombard loans don’t provide the kind of leverage I need. Not all my assets are used as collateral (I’m using stocks in my 3a pil…

[Dr.PI]

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 .

[Dr.PI]

UPRO Still Positive After Two Years And Two Bear Markets

[Dr.PI]

@oslasho

not sure if true, but i’ve read more than once that a leverage ratio of 2 is favorable vs. 3 (s&p 500 as well as nasdaq 100).

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.

[Dr.PI]

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.

[xmj]

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

Probably a better bet in case of downturns

[Wolverine]

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.

[johndoe1]

@xmj

Have you considered NTSX?

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

[Helix]

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?

[Helix]

@Dr.PI

100% SSO, TER 0.92%
50% UPRO, 50% VOO, TER 0.5%.

I’m not sure the second allocation can stay around 2x without frequent rebalancing. This frequent rebalancing would have to stay below 0.42% cost.

EDIT: Checking numbers
If one accepts a maximum of 0.2 leverage deviation (coresponding to 60/40 or 40/60), then portfoliovisualizer.com gives me about one rebalancing per year in the last 5 years. A bit less frequently before, and 2 events in 2020. The rebalancing band was set to absolute 10%.

Rebalancing cost thus breaks even at a yearly:
0.42% / 10% = 4.2% = 2 x 2.1%

To spend more than 2.1% for buying or selling assets is highly unrealistic with a mustachian broker. IBKR wants 0.005 per share in FIXED (1 USD minimum). Assuming your share costs more than 5, then your cost is a maximum of 0.1%. Probably more like 0.01% or 0.001% looking at the actual price of UPRO and VOO.

That means my assumptions can be off by at least 21x, probably more like 210x, and still hold.

Congratulations, your solution seems efficient.

[Dr.PI]

Note that I am accumulating, so I can reduce the need for selling to rebalance by directing new funds and dividends.

[Helix]

If someone speaks German perchance: I found “ZahlGrafs Exzellente Abenteuer” on Reddit.

ZahlGraf extensively discusses different leverages and allocations on S&P 500 and Treasuries. They also elaborate how they generate backtesting data down to 1943 including fund management cost and variable borrowing rates. The discussion has a focus on Germany (available instruments, taxes). The data is available for download (git clone).

If your German is not that good: You could probably use Google Translate and still get lots of information. But still there is heavy use of Reddit German (direct translations of English words. E.g. “mauerstrassenwetten” aka. “wallstreetbets”) which could confuse the translation engine (and normal people for that matter).

[Velli]

Hi Helix,
Considering that CHF tends to be considered as a safe haven in case of a crash and typically the CHF becomes stronger vs USD is not holding simply CHF a good alternative to a government bond?

[Cortana]

I‘m using a combination of VTI and UPRO to stay slightly leveraged into the US stock market. Aiming for 15% UPRO and 85% VTI. I plan to rebalance once my leverage ratio of 1.3 is below 1.2 or above 1.4. For example a 20% correction:

VTI goes from 85k to 68k, UPRO goes from 15k to 6k (simplified, I now). New leverage is 1.16. So I buy 5.1k UPRO and sell 5.1k VTI. Thus being back to a leverage ratio of 1.3 with 62.9k VTI and 11.1k UPRO. Market recovers back to previous levels (+25%), VTI goes from 62.9k to 78.6k and UPRO from 11.1k to 19.4k (again simplified). I‘m back at 98k and lost 2% due to volatility drag.

Is there a cheaper variant to stay leveraged? Buying call options? Futures?

[Dr.PI]

@Cortana

Is there a cheaper variant to stay leveraged?

A cheaper: yes, definitely, futures. But my conclusion was that UPRO wins by simplicity of leveraging (and granularity) without being overly expensive.