Part of the difficulty is knowing when we are after a downturn.
For those who want to try their mettle:
A) Here’s the SPY (SPDR S&P500 Investment Trust, tracking the S&P500 Index) on a 2 years period: down 27%, then up 15% from the bottom. Time to buy?
B) Same exercise with VFIAX (Vanguard 500 Index Fund Admiral Shares, tracking the same index) during another 2 years period: down 19% then up 15% from the bottom. Time to buy?
Agree 100%. buy low & sell high is easy to preach but difficult to do. Plus you have to have money on the side.
Below interesting analysis.
Bottom line market goes down 15%, wait a little is not a 20% correction and buy. As soon as hit over 20% correction, it’s quite rare, just buy.
And I bought one, but it was 23k.
I always thought ES futures would be very interesting as a Swiss investor since you avoid dividend tax drag too.
Downside, you play implied financing cost (and can’t really park USD anywhere for similar rate) and maybe some small tracking error. If you want to leverage portfolio anyway then can be great.
How do mini futures work? Do they need margin?
Wouldn’t you take on an US bias and what would be the duration?
I am not really bullish on the Us as a region going forward. 
Warning to everyone: always check lot size for futures or it is very easily to get screwed (or FIRE prematurely). ES futures are S&P500 x50, i.e. one lot 230k USD. I bought MES which are x5.
Yes, it is written on the page of the instrument. For MES it is around 2k USD per contract. What is nice, as far as I know, collateral cash could be in any currency, so you can just deposit 2k CHF and avoid currency fluctuations.
I increase US exposure at IB and recalculate my other holdings (finpension) to get to ACWI geographic weights in the whole portfolio.
Market rate, i.e. less than margin loan rates.
Yes but your margin requirements are like 5%. So you are paying implied financing on 100% of the notional and then if not leveraging need to park 95% of the cash somewhere else.
Where would you park the 95% of your remaining cash? IBKR pays nothing, US treasuries/cash pays very little and yield is subject to income tax, etc.
Other challenges I found included:
Bit more.
I am leveraging.
There are Euro Stoxx 50 and Nikkei and even SMI (!) if you want. But I don’t.
One of the lowest. Only SMI micro is smaller. And it is called micro actually.
Why do you think I have “entire portfolio exposed through derivatives”?
I am increasing total portfolio size without paying it 100% in cash. And yes, leverage comes with interest, but you have to convince me with numbers that it is not cheaper than alternatives.
I could have bought European futures and replace part of the exposure to European stocks by futures, but I prefer MES. Doesn’t matter, I can calculate how to bring portfolio to a geographically correct weighting.
My comments aren’t with regards to your full strategy, just the challenges I found when looking at index fund futures for tax efficiency + equity leverage in Switzerland.
But if you’ve found good solutions to them I would be interested to hear.
MES are currently $1.15k maintenance margin on $23.4k notional = ~5%.
Even if you are leveraging 2:1 you have a big chunk of extra cash to park somewhere.
Once you start looking at volume and ticket sizes it becomes very hard to use to a desired weighting in a portfolio.
So what is your overall portfolio? Something like 90% equities and then 110% in MES using the 10% cash buffer?
So from a slightly newbie perspective you are using Mini-Futures to achieve leverage on the US part of your portfolio?!
I assume this is slightly cheaper than leveraged ETFs?!
But would both have the same outcome? It seems leveraged ETFs are slightly more hands-off but with higher cost, no?
Not worrying about margin would be something important to me.
There are different numbers and they are changing. Yesterday the overnight margin was like 2.1k USD I think, today it could be lower because the volatility went down.
I don’t understand. I use cash as a collateral and a cushion in case of the value decrease. Other cash is in other places. I can add more from my ongoing savings, in worst case it will be a margin loan.
Stocks: 150+ k in US ETFs at IB, 60+k in stocks index funds at finpension + some other funds. I am investing almost everything that is left at the end of the month. One MES is less than 10% on top of amount invested in stock funds.
My wife is accumulating cash, so I don’t know exactly how much is there. With our 2nd pillars we are below 50% in stocks.
Yes, and by extension on the whole portfolio.
Probably.
No. Leveraged ETFs use derivatives to keep a constant leverage rate. So if index goes up, they buy with gains more futures, for example, and if index goes down, they have to sell futures to decrease the leverage. At least that is my understanding, and I don’t know another way to keep leverage constant. So kind of counterproductive, and no surprise that in the long term you lose.
Future has a fixed lot size, like 5x SPX. If index goes up, you receive cash, if it goes down, you are losing cash, but the market value remains fixed. If market moves against you, you can add more cash to compensate losses, but you are not losing “overproportionally”.
Let’s say SPX is at 4000, it first moves up 500 points, then down 500 points.
With a 5x future you are almost at 0 difference, first getting 2500, then losing 2500 (there are implicit financing costs and accounting for dividends, but let’s ignore it for now).
With a 3x leveraged ETF and a starting value 20000 you first win 3*(500/4000)20000 = 7500. Now the value of your stake is 27500 and the leverage went down. The fund is buying more futures to be 3x leveraged again. Then you lose 3(500/4500)*27500= 9166. You have lost 1666.
If you are using IBKR then their risk algos will set margin higher yes true. I see right now it is ~2k / ~9% overnight margin.
And ok if you are just leveraging 1.1x then this works well - I agree the cheapest leverage you will get.
My struggle in the past was trying to get full exposure through index futures to avoid dividend tax drag.
I was thinking about it and decided not to do. The main reason for me was that actually if you throw away dividends from the very beginning, you can’t reinvest them. And this is where magic happens, the long term portfolio growth is not due to the price increase, but due to the compounding effect.
Index futures aren’t throwing away the dividends, expected dividends are accounted for in the price (amongst financing costs etc.).
https://www.cmegroup.com/trading/equity-index/report-a-cost-comparison-of-futures-and-etfs.html
Why the huge drop in UPRO today? (~50%)
Shares split:
@Dr.PI or other.
If the market drops down let’s 20-30% from ATH. Would you buy the e-mini s&p500 futures?
E.g. buy 5 slots at around 100k chf and ride it back up? Or do you think you can be wiped out before at 50x?
I didn’t forget about your question, was just gathering experience, both technical and emotional. I am still not finished. But I can tell you that I would never take a position in futures more than 25% of what I have at IB. I am counting roughly with a sudden drop of portfolio value by 50%. In this case I am 50% of original value in stocks. Margin requirements are 50%, so I can still have a negative cash position equal to 25% of original value. With futures I am at roughly -12% in cash, so my positions are still alive.
It would be extremely stupid to wipe out my life’s savings in an occasional market dip and it would certainly have very serious personal consequences.
So with this constraint I can take only one micro S&P500 future. I was also thinking about a separate small portfolio with a high leverage, but - why would I take more risk for the same absolute exposure?
