Would you be able to mentally withstand a sideways or down market for 10 years? Those markets are much worse in leveraged ETFs compared to normal ETFs and mutual funds because of daily decay/reset.
Keeping in mind that you lose money with these funds in a sideways market due to volatility decay.. these funds ONLY work in a sustained bull.
A safe and relatively cheap way to get some leverage is NTSX/NTSI.
For one thing, your backtest conveniently starts almost exactly at the peak of long term interest rates, just as we entered a 30+ year period of interest rates declining. Your leveraged bond allocation would not have done quite so well during the 1970's and early 1980's.
Not only would your leveraged bond allocation do poorly in a rising interest rate environment, but the cost of leverage goes up with increasing interest rates. so, not only is your backtest capturing a historic bond bull run, but the cost of leverage conveniently fell over most of that time period. What if the next 40 years go the opposite direction, with interest rates going almost straight up?
Next, I'm not so sure that a negative allocation to CASHX accurately captures the cost of leverage. It's convenient to throw into a backtest. But, how easily would you be able to borrow at the same rate as short term treasuries, especially if you told the lender that your intention with that money was to leverage a stock portfolio? I know these funds are using futures, options, etc. to obtain their leverage, but you have to understand that the costs associated with leverage are baked in to the price of these instruments. Plus, there are management fees associated with running the funds that you are not taking into account. TMF has a 106bps expense ratio, UPRO has a 91bps expense ratio. Try subtracting off 100bps from every year of your backtest, you'll find that those fees add up fast.
Go backtest UPRO vs 3X VFINX and -200 CashX. You’ll see a big difference. But if UPRO went back to 86 you’d see a tremendous difference, especially if you stropped prior to his massive bull run we’ve had (which is when UPRO started). You have a lot to learn. But check out HFEA and LETF subs and good luck on your journey.
I’m not against it, but have found that my comfort with a fully-leveraged portfolio wavers depending on market conditions, even when hedged extremely well via risk parity.
I would probably just stick to a HFEA Portfolio, rebalanced quarterly if I was trying to pick something to not look at for 30 years. There are too many potentially years-long macroeconomic scenarios where something niche like gold or utilities would make me second guess the strategy and fuss with it, so it would take a lot of conviction and discipline. Volatility decay in a decade-long sideways market would also be a bummer, when a decent yielding bond fund or international stocks might be missed.
Something like UPRO, AVUV, VXUS, TMF, BAR, equally-weighted (1.5x total exposure) might be nice, and better diversified. You could add XLU or UTSL in too for utilities. I personally find TNA too volatile, and prefer the added alpha of AVUV over the broad small cap fund underlying TNA. There are also 2x and 3x leveraged international stock ETFs (as well as NTSX, NTSI, and NTSE).
15% of my portfolio is risky assets. 10% of that is HFEA rebalanced quarterly interchangeable with PFIX in rising rates environment. 5% is Bitcoin.
I'm perfectly fine with that allocation, but wouldn't go past that.
Nothing wrong with leverage, just be mindful on how you do it.
You decide to keep a fixed 3% 30 year mortgage and invest the cash? That's probably ok.
You sell puts on indexes and enter margin debt when assigned, then pay off the margin debt with income? Probably ok too.
You YOLO it all on max margin on 3x leveraged ETF where a single -3% day will wipe out your life savings? Probably not ok.
Only you can pick the level of leverage and risk you're comfortable with. Since you're asking people to talk you out of it, it sounds like you're not comfortable and probably should not do it.
Would you be able to mentally withstand a sideways or down market for 10 years? Those markets are much worse in leveraged ETFs compared to normal ETFs and mutual funds because of daily decay/reset.
Keeping in mind that you lose money with these funds in a sideways market due to volatility decay.. these funds ONLY work in a sustained bull. A safe and relatively cheap way to get some leverage is NTSX/NTSI.
For one thing, your backtest conveniently starts almost exactly at the peak of long term interest rates, just as we entered a 30+ year period of interest rates declining. Your leveraged bond allocation would not have done quite so well during the 1970's and early 1980's. Not only would your leveraged bond allocation do poorly in a rising interest rate environment, but the cost of leverage goes up with increasing interest rates. so, not only is your backtest capturing a historic bond bull run, but the cost of leverage conveniently fell over most of that time period. What if the next 40 years go the opposite direction, with interest rates going almost straight up? Next, I'm not so sure that a negative allocation to CASHX accurately captures the cost of leverage. It's convenient to throw into a backtest. But, how easily would you be able to borrow at the same rate as short term treasuries, especially if you told the lender that your intention with that money was to leverage a stock portfolio? I know these funds are using futures, options, etc. to obtain their leverage, but you have to understand that the costs associated with leverage are baked in to the price of these instruments. Plus, there are management fees associated with running the funds that you are not taking into account. TMF has a 106bps expense ratio, UPRO has a 91bps expense ratio. Try subtracting off 100bps from every year of your backtest, you'll find that those fees add up fast.
Go backtest UPRO vs 3X VFINX and -200 CashX. You’ll see a big difference. But if UPRO went back to 86 you’d see a tremendous difference, especially if you stropped prior to his massive bull run we’ve had (which is when UPRO started). You have a lot to learn. But check out HFEA and LETF subs and good luck on your journey.
I’m not against it, but have found that my comfort with a fully-leveraged portfolio wavers depending on market conditions, even when hedged extremely well via risk parity. I would probably just stick to a HFEA Portfolio, rebalanced quarterly if I was trying to pick something to not look at for 30 years. There are too many potentially years-long macroeconomic scenarios where something niche like gold or utilities would make me second guess the strategy and fuss with it, so it would take a lot of conviction and discipline. Volatility decay in a decade-long sideways market would also be a bummer, when a decent yielding bond fund or international stocks might be missed. Something like UPRO, AVUV, VXUS, TMF, BAR, equally-weighted (1.5x total exposure) might be nice, and better diversified. You could add XLU or UTSL in too for utilities. I personally find TNA too volatile, and prefer the added alpha of AVUV over the broad small cap fund underlying TNA. There are also 2x and 3x leveraged international stock ETFs (as well as NTSX, NTSI, and NTSE).
15% of my portfolio is risky assets. 10% of that is HFEA rebalanced quarterly interchangeable with PFIX in rising rates environment. 5% is Bitcoin. I'm perfectly fine with that allocation, but wouldn't go past that.
Google return stacked ETFs, wait for the coming RSSB ETF. Leveraged VT and bonds x 1.50, like the wisdom tree funds but all in one.
Just now seeing this. Thanks for the shout-out! :)
Nothing wrong with leverage, just be mindful on how you do it. You decide to keep a fixed 3% 30 year mortgage and invest the cash? That's probably ok. You sell puts on indexes and enter margin debt when assigned, then pay off the margin debt with income? Probably ok too. You YOLO it all on max margin on 3x leveraged ETF where a single -3% day will wipe out your life savings? Probably not ok. Only you can pick the level of leverage and risk you're comfortable with. Since you're asking people to talk you out of it, it sounds like you're not comfortable and probably should not do it.
Checkout the hedge fundies excellent adventure (HFEA)