RetireJapan

I apologize for stirring up the hornet's nest here but I would like to know if anyone is using leveraged ETFs as part of their investment strategy? I know these are very risky and not suitable at all for retirement purposes but if one had invested in them with a sensible strategy in 2011 then they would have already been very close to their retirement target by now.

One such strategy is laid down in below posts:

https://www.bogleheads.org/forum/viewto ... 0&t=272007

https://www.bogleheads.org/forum/viewto ... 0&t=288192

The portfolio visualizer shows that this strategy has tremendous potential

(https://www.portfoliovisualizer.com/bac ... ion4_3=100)

I started by investing some funds in this strategy (TQQQ 55% / TMF 45%) in my IBKR account as a trial basis and so far the results are excellent.

Anyone else running this strategy and if yes then are they doing it in their NISA account?

RMA wrote: ↑Mon Aug 30, 2021 2:43 am I apologize for stirring up the hornet's nest here but I would like to know if anyone is using leveraged ETFs as part of their investment strategy? I know these are very risky and not suitable at all for retirement purposes but if one had invested in them with a sensible strategy in 2011 then they would have already been very close to their retirement target by now.

One such strategy is laid down in below posts:

https://www.bogleheads.org/forum/viewto ... 0&t=272007

https://www.bogleheads.org/forum/viewto ... 0&t=288192

The portfolio visualizer shows that this strategy has tremendous potential

(https://www.portfoliovisualizer.com/bac ... ion4_3=100)

I started by investing some funds in this strategy (TQQQ 55% / TMF 45%) in my IBKR account as a trial basis and so far the results are excellent.

Anyone else running this strategy and if yes then are they doing it in their NISA account?

It sounds like you understand the risks. A 33% drawdown will means that you are at 0. The risks are extreme indeed.

Backtest your portfolio during an extended bear market, can your heart handle that?

The prospecti says themselves that these instruments are not meant to be held for more than a single trading day. So know that you are using playing with fire.

We are in the biggest bull run in market history, please be cautious with assuming it will remain so indefinitely.

Established wrote: ↑Mon Aug 30, 2021 3:04 am A 33% drawdown will means that you are at 0. The risks are extreme indeed.

These ETFs are reset daily so it will take 33% drop in a single day to wipe out the fund but there are circuit breakers which will not let them drop 33% in a day.

Established wrote: ↑Mon Aug 30, 2021 3:04 am Backtest your portfolio during an extended bear market, can your heart handle that?

It has been thoroughly backtested with various simulations and everytime it has outperformed S&P500 so far. All the details are there in the original bogglehead posts which I linked before.

Having said that, they are highly risky and one must invest in these only what they can afford to lose (not much different from cryptos).

RMA wrote: ↑Mon Aug 30, 2021 3:24 am

Established wrote: ↑Mon Aug 30, 2021 3:04 am A 33% drawdown will means that you are at 0. The risks are extreme indeed.

These ETFs are reset daily so it will take 33% drop in a single day to wipe out the fund but there are circuit breakers which will not let them drop 33% in a day.

Established wrote: ↑Mon Aug 30, 2021 3:04 am Backtest your portfolio during an extended bear market, can your heart handle that?

It has been thoroughly backtested with various simulations and everytime it has outperformed S&P500 so far. All the details are there in the original bogglehead posts which I linked before.

Having said that, they are highly risky and one must invest in these only what they can afford to lose (not much different from cryptos).

https://www.cnbc.com/2018/02/06/the-obs ... lunge.html

This is the kinda thing that might keep you up at night.

The original thread from the forum also includes this important disclaimer.

"This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk."

RMA wrote: ↑Mon Aug 30, 2021 2:43 am

I started by investing some funds in this strategy (TQQQ 55% / TMF 45%) in my IBKR account as a trial basis and so far the results are excellent.

Anyone else running this strategy and if yes then are they doing it in their NISA account?

Leveraged ETFs are a fascinating subject.

I think going with the Nasdaq instead of the S&P500 creates too much undue risk. Backtest shows that the S&P500 is a "safter" bet overall. Recency bias has many gravitating towards tech and making a sector bet.

I would suggest SPXL and TMF at 55/45 in a NISA. Or taxable if you prefer to allocate your tax-free space to safer investments.

That being said:

1. I think if it is 10% or so of a portfolio that is otherwise invested in safe assets (Low-cost diversified index funds etc)

2. You rebalance quarterly with rebuying.

3. Your Outlook is decades, not years.

4. You understand that there is an excellent chance this holding will drop way down, and you may need to wait years for it to rebound.

I could understand it.

..............................................

As far as "safe" leverage bets go Rakuten USA 360 fund is fascinating 90% S&P500, 10% X3 5 Year treasuries.

https://www.rakuten-toushin.co.jp/fund/nav/riusa360/

..............................................

Disclosure. Tiny SPXL/TMF position in my MOnex taxable.

Everything else is All Country or Rakuten Global Equities

EmaxisSlim Cultist wrote: ↑Thu Sep 09, 2021 4:18 am
That being said:

1. I think if it is 10% or so of a portfolio that is otherwise invested in safe assets (Low-cost diversified index funds etc)

2. You rebalance quarterly with rebuying.

3. Your Outlook is decades, not years.

4. You understand that there is an excellent chance this holding will drop way down, and you may need to wait years for it to rebound.

These are excellent points which one must consider before even touching the leveraged ETFs. I am well aware of these points and hence decided to allocate only small portion of my portfolio in this strategy.

First I wanted to use NISA account for this strategy but rebalancing seemed difficult so I went with taxable account. I plan to rebalance every 3 months only by buying the asset which has dropped below its ratio to maintain the desired ratio, that way the cash inflows are minimum and there is no selling involved. Looking to continue it for minimum next 5 years unless one of the funds goes to zero (lol). May include UPRO or SPXL in future but will keep the overall ratio same (i.e. 55/45).

In the meantime, I am also selling monthly far OTM covered calls on TMF (can't sell covered calls on TQQQ as I don't have 100 shares yet) to lower my cost basis.

I have experience... hopefully just a cautonionary tale because I'm sure you'll be smarter than me.

Back when Trump was first elected, you may recall he was going on about how he was going to tariff the hell out of China and other countries to restore the trade balance. As I was doing geopolitical analysis at the time for work, I knew he was serious and would follow through, and with other countries promising retributory tariffs, I was convinced this was going to have a major negative impact on global trade and thus the global economy. I also thought the markets were not pricing this risk in, as they kept rising following his election ... and I saw an opportunity. So I decided to sell a large chunk of my index funds, and placed a big bet that the market would go down. I did so via the only instrument I had access to at the time, a 3x leveraged bear fund shorting the Nikkei 225. Given the Nikkei 225 correlates fairly well with the S&P, and given the global nature of the tariff problems, I was sure I was going to rake it in, and was rubbing my hands with glee at my upcoming windfall.

Well, the tariffs and retaliatory action did indeed come, and global trade did take a dip, but the markets held firm. Actually, not just held firm, but went up. I held on to that dog of an investment for almost a year before finally biting the bullet and selling. With the large capital loss, plus counting the opportunity cost of all the gains I missed out on if I had just kept it in an index, I figure it cost me about 1,000man all told… biggest investing mistake I’ve made. My lessons learned were: 1. stop trying to beat the market and stick to plain vanilla indexing; or 2. if you’re going to gamble, gamble with small portfolio percentages only; or 3. don’t bet against the greatest US president of all time because he will kick your ass

RMA wrote: ↑Mon Sep 13, 2021 1:39 am

EmaxisSlim Cultist wrote: ↑Thu Sep 09, 2021 4:18 am
That being said:

1. I think if it is 10% or so of a portfolio that is otherwise invested in safe assets (Low-cost diversified index funds etc)

2. You rebalance quarterly with rebuying.

3. Your Outlook is decades, not years.

4. You understand that there is an excellent chance this holding will drop way down, and you may need to wait years for it to rebound.

These are excellent points which one must consider before even touching the leveraged ETFs. I am well aware of these points and hence decided to allocate only small portion of my portfolio in this strategy.

First I wanted to use NISA account for this strategy but rebalancing seemed difficult so I went with taxable account. I plan to rebalance every 3 months only by buying the asset which has dropped below its ratio to maintain the desired ratio, that way the cash inflows are minimum and there is no selling involved. Looking to continue it for minimum next 5 years unless one of the funds goes to zero (lol). May include UPRO or SPXL in future but will keep the overall ratio same (i.e. 55/45).

In the meantime, I am also selling monthly far OTM covered calls on TMF (can't sell covered calls on TQQQ as I don't have 100 shares yet) to lower my cost basis.

It all comes down to an appetite for risk in the end.

You have made a more concentrated bet in continued tech-outperformance vs a general US market outperformance. Only time will tell what is the correct play. However, statistically, the S&P500 is a safer bet.

Covered calls OTM is an interesting play.

The potential issue there is just how OTM they are, and whether or not you are restricting TMFs ability to act as ballast during a downturn by capping its potential upside. It is crash protection in a sense, you do not want to clip its wings.

mighty58 - 3x leveraged bear fund shorting the Nikkei 225.

The OP is talking about a much different play.

US equities and Long treasuries are not very correlated.

3x Equities and 3x 20 year bonds held together at around 60/40 allow for outperformance in bull markets and offer considerable downturn protection. It is a high risk, higher reward "Boglehead" index play.

In Backtests it easily beats standard indexing over a long time horizon, but causes stomach-churning drops in recessions.

For more information google "hedgefundie"

mighty58 wrote: ↑Mon Sep 13, 2021 2:07 am

Nice post, thanks for sharing. It's nice to bring a touch of reality to the too easy to ignore stark warnings that otherwise cause threads like this to lead people down the wrong path.

Sorry to hear about your misfortune. It's only money, though. If you have health, security, relationships, it's just one part of the big picture. Now you just have to make it all back on Etherium

P.S. I think I know who EmaxisSlim Cultist is...

adamu wrote: ↑Mon Sep 13, 2021 4:50 am

mighty58 wrote: ↑Mon Sep 13, 2021 2:07 am

Nice post, thanks for sharing. It's nice to bring a touch of reality to the too easy to ignore stark warnings that otherwise cause threads like this to lead people down the wrong path.

Sorry to hear about your misfortune. It's only money, though. If you have health, security, relationships, it's just one part of the big picture. Now you just have to make it all back on Etherium

Mighty58 -> This is more an indictment of the dangers of market timing though, not risk parity approaches to leverage etf investing.

However, whenever leverage ETFs are mentioned, I usually go out of my way to highlight the risks, when you are attempting to use a short-term instrument for long-term gain you need to accept the inherent dangers.

I personally think TQQQ 55% / TMF 45% is too sector concentrated.

However, I am sure some here think UPRO 55% / TMF 45% would be too country concentrated. (There are no world 3x funds).

Personally, when it comes to risk I think a leverage index fund is less speculative in nature compared to single equities or crypto. The same underlying principles come into play as with traditional index investing.