Buying 3x bull sp500 for long term portfolio

[Overnight]

LOL.

Fair enough on the fill. I don't trade that far out and have no clue about the practicalities on this.

Indeed, it is quite annoying that the big houses do not hedge that far out, and I simply don't know why that is. I suppose they don't want to lock up money for such a long time, unlike CL contracts, which have some liquidity years out. Maybe because CL is a physical commodity, where SP is just cash.

 

[ET180]

What would you suggest? margin ? leaps?

Probably leaps or ratio. Then be prepared to buy the underlying if it hits your short strike.

 

[David's faith]

Buy the future and roll it over if necessary.

 

[wmwmw]

First of all, there's a question of timing your long term purchase. I'm not going to comment on that piece. I'm sure you'll get plenty of opinions on that soon enough.

All of these leveraged (and even unleveraged) ETFs that reset daily have the same fundamental characteristics: they decay faster than the index they "track" (after factoring out the impact of their leverage) when there is a lot of volatility and they outperform when there is low volatility (and the direction also has to be in your favour, of course). So, for a long term trade, you are actually making a bet both on the direction and on future volatility. Incidentally, this is related to the concept of optimal re-balancing frequency of a portfolio: these ETFs essentially use an extreme re-balancing rule that can work in your favour or against you.

Parenthetically, I spent several months analyzing these products to see if I could squeeze some alpha out of simultaneous long/short positions among certain combinations of them at specific times. (This is one of the types of trading I specialize in, using statistical models.) There was something there, but unfortunately, the short fees were too high and unpredictable for it to be a practical approach and I abandoned it.

If you are making a short term trade, you can get a lot of extra "juice" with the leverage, but that's not what you're asking about.

If you haven't already done so, I would recommend spending a little time analyzing the characteristics of daily re-balancing ETFs in a simple excel spreadsheet (or more powerful software if you prefer). Just start with a column of daily SPY prices. Then construct for yourself what a 1x (no leverage) daily rebalanced ETF would have done. Look at the periods where it outperformed, the periods where it underperformed and why. Then do the same for a 2x / 3x daily rebalanced ETF. Then look at the inverses. You should notice some interesting things.

Once you've got that down, then you can create your own theoretical "SPY" prices based on returns and volatility that you set and see how the daily rebalanced ETFs would have behaved. I recommend this theoretical sandbox approach to complement simply looking at historical performance of various ETFs.

Edit: To more directly answer your question, how SPXL will behave if the SP500 sits at a specific level for 1-2 years almost entirely depends on the volatility during that period. If there is sufficient volatility, it will decay. In fact, under the right circumstances, SPXL and SPXU will both decay simultaneously. This is part of the reason I suggest modeling the behaviour of the various ETFs, as outlined above: you can start to ask more nuanced "what-if" questions and see what would happen over a range of scenarios of interest.

If I was trying to do this, I would consider futures.

Just for fun, I pulled up some ES data. It looks like ES Sep 2022 is around 3683, Sep 2023 is around 3759, and the index is around 3666.

Let's take Sep 2023 just to get in the ballpark of OP's original time scale. It's trading at a ~2.5% premium to the index. Presumably this wouldn't be an issue for OP since he's speculating for a large capital gain.

With my non-portfolio margin IB account, this contract requires 16K-25K margin (depending on initial vs maintenance and intraday vs overnight). Let's call it 25K, which is the overnight initial margin. Of course different brokers offer different margin, etc, but this is just to give a ballpark sense for someone who doesn't have their own numbers to work with.

1 contract of ES controls 50x3759 = ~$190K notional. (Sorry @Overnight!)

So, let's suppose your account is $1M and you want to the "equivalent" of putting the whole thing into a 3x SP500 ETF. (It's not actually equivalent, for the reasons discussed earlier.) Then, that means you want ~ $3M notional. $3M / 0.2M = 15 contracts. 15 contracts requires ~ 15x25K = $375K margin. Done. Buy 15 contracts and you'll basically get the equivalent of 3x leverage on SP500 based on your full account value.

No discussion here of margin calls, etc. Occasionally I read scary posts on ET that reveal some people trade things they don't understand well enough and get themselves into trouble. If that could be you (not OP but "you" the reader) then don't just assume this post is the end of the story and please go learn more before you risk your capital.

Your method sucks. In a market crash it spells disaster.
In a bull market it profits much less than holding a 3x ETF.

A one million account holds 15 ES contracts.
So if spx drop 1000 points, your account lose $750000. In early 2020 SPX drop 1200 points. Your account lose $900000.Your account would be liquidated well before that.The problem is not only this. Even your account did not get liquidated, at that time what makes you believe spx would not drop another 1000 points so you still dare to hold 15 contracts on a $100000 account?
Now suppose market goes up every year for 5 years. If each year market goes up 20% , and a 3xETF goes up 50% each year.A 3xETF account calculates as 1.5x1.5x1.5x1.5x1.5x 1 million.
While your futures account calculates as 1.2x1.2x1.2x1.2x1.2x 1 million.At the end of 5 years 3xETF account has 7.59 million.Your futures account has 2.49 million.
Your futures account does not have decay, but it is 100 times worse than decay.Higher risk lower reward.

 

[wmwmw]

If I was trying to do this, I would consider futures.

Just for fun, I pulled up some ES data. It looks like ES Sep 2022 is around 3683, Sep 2023 is around 3759, and the index is around 3666.

Let's take Sep 2023 just to get in the ballpark of OP's original time scale. It's trading at a ~2.5% premium to the index. Presumably this wouldn't be an issue for OP since he's speculating for a large capital gain.

With my non-portfolio margin IB account, this contract requires 16K-25K margin (depending on initial vs maintenance and intraday vs overnight). Let's call it 25K, which is the overnight initial margin. Of course different brokers offer different margin, etc, but this is just to give a ballpark sense for someone who doesn't have their own numbers to work with.

1 contract of ES controls 50x3759 = ~$190K notional. (Sorry @Overnight!)

So, let's suppose your account is $1M and you want to the "equivalent" of putting the whole thing into a 3x SP500 ETF. (It's not actually equivalent, for the reasons discussed earlier.) Then, that means you want ~ $3M notional. $3M / 0.2M = 15 contracts. 15 contracts requires ~ 15x25K = $375K margin. Done. Buy 15 contracts and you'll basically get the equivalent of 3x leverage on SP500 based on your full account value.

No discussion here of margin calls, etc. Occasionally I read scary posts on ET that reveal some people trade things they don't understand well enough and get themselves into trouble. If that could be you (not OP but "you" the reader) then don't just assume this post is the end of the story and please go learn more before you risk your capital.

From Feb 2020 high to March 2020 low, 3XETF SPXL drop 78%, yet your futures account drop 90%.
From Jan 4,2022 to June 17, 2022,SPXL drop 59%, yet your futures account drop 86%.

It is funny your futures account is supposed to avoid decay and drop less in a big market decline, but in reality it drop more than a 3XETF account.

Now two accounts:
3XETF account at $410000 worth but without risk of an account blow up;
Futures account at $140000 worth on 15 contracts ES, the blow up of account looks inevitable.
Which one you prefer to hold?

 

[john7722]

WMWMW do you have 3x in your porfolio as a long term investment? I am worried little bit investing in futures due to the facts you are stating. But I don't understand futures or 3x that well. I like the idea of my account not blowing up and not getting margin call and liquidation.

3x ETF are risky and decaying but If we get big enough drop let say below 2800 I think I am gonna take a risk and I will make maybe 5% of my portfolio 3x sp500.

 

[wmwmw]

WMWMW do you have 3x in your porfolio as a long term investment? I am worried little bit investing in futures due to the facts you are stating. But I don't understand futures or 3x that well. I like the idea of my account not blowing up and not getting margin call and liquidation.

3x ETF are risky and decaying but If we get big enough drop let say below 2800 I think I am gonna take a risk and I will make maybe 5% of my portfolio 3x sp500.

I don't trade 3XETF, I trade futures which is riskier than 3X ETF.

If you want to buy 3XETF, then you are looking for high reward, so you need to tolerate high risk. Decay and market going down both are risks that you need to face.
A lot of people say 3XETF is only for short term trading, not for long term holding. But they forget one thing: short term trading itself is a high risk thing,its risk is higher than holding it for long term.Traders who lose money from short term trading, much more than losing money from decay of a 3XETF.100 people who trade 3XETF for short term, only 1 can beat the one who holds it for long term. Futures are definitely not a good long term holding instrument.

 

[john7722]

I don't trade 3XETF, I trade futures which is riskier than 3X ETF.

If you want to buy 3XETF, then you are looking for high reward, so you need to tolerate high risk. Decay and market going down both are risks that you need to face.
A lot of people say 3XETF is only for short term trading, not for long term holding. But they forget one thing: short term trading itself is a high risk thing,its risk is higher than holding it for long term.Traders who lose money from short term trading, much more than losing money from decay of a 3XETF.100 people who trade 3XETF for short term, only 1 can beat the one who holds it for long term. Futures are definitely not a good long term holding instrument.

Isn't the risk in 3x smaller if I buy it in recession ? I would never ever buy it when sp500 was at 4500 levels.But what is the risk when you buy it at 2800 levels...Let say it goes then to 1500 levels....It should not stay there forever. My 3x would be drop 80% , then I just buy little more buy selling some SPY. I am optimistic person and I don't believe we would have 5 year long recession . It seems that recessions in USA end rather quickly 1-2y max.

 

[wmwmw]

Isn't the risk in 3x smaller if I buy it in recession ? I would never ever buy it when sp500 was at 4500 levels.But what is the risk when you buy it at 2800 levels...Let say it goes then to 1500 levels....It should not stay there forever. My 3x would be drop 80% , then I just buy little more buy selling some SPY. I am optimistic person and I don't believe we would have 5 year long recession . It seems that recessions in USA end rather quickly 1-2y max.

Yes, I think betting on a 3Xetf on belief a recession will be less than 5 years is a better option than betting on your trading short term or betting on a futures long term holding.

 

[john7722]

I had extra cash right when sp500 hit low during covid, I bought sp500 at around 2500 . At that time I didn't think of buying 3x . I would have some $ in 3x. I'll wait a bit to see how it plays out. If I lose 10% of my porfolio because of some 10 year long recession then be it....By that time i'll have some extra $ and by SPXL until we have a recovery .