Why Leveraged ETFs Are Too Risky for Retirement Accounts

[Kevin Schmit]

Let me see if I understand what you were saying: When you do levered QQQ, rebalancing will worsen your absolute return?

No, rebalancing a two-asset universal portfolio (levered QQQ and cash, which can be negative), in the absense of transaction costs (that's why RobinHood and MOC), should increase your absolute and perhaps also your risk-adjusted return.

Google the terms "volatility pump," "universal portfolio," and "Thomas Cover." Since you are taking an Excel VBA class, you might be interested in the vol pump excel/vba code posted on the archived Gummy Stuff website.

 

[market-boss]

leveraged ETF are just for daytrading they are not meant for long term buy and hold okay!
I would say 90% of the ETF have no volume and pretty much illiquid. and the ETF don`t even the underlying shares. a lot of the ETF own derivatives not the shares.

 

[ironchef]

No, rebalancing a two-asset universal portfolio (levered QQQ and cash, which can be negative), in the absense of transaction costs (that's why RobinHood and MOC), should increase your absolute and perhaps also your risk-adjusted return.

Google the terms "volatility pump," "universal portfolio," and "Thomas Cover." Since you are taking an Excel VBA class, you might be interested in the vol pump excel/vba code posted on the archived Gummy Stuff website.

Thanks. I will Google those. But first I should be able to backtest this QQQ and cash with my newly learned VBA skill.

 

[murray t turtle]

Problem with these leveraged ETF's (looking in isolation) investor can not sustain huge drawdown and abandon at the worse possible time. These are best suited when paired with some what negatively correlated instruments like long bond and/or gold.

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Another big problem for some; have to manage + moniter those+ they seldom pay a REAL good dividend.And the managers have such big shipping cost on the 200-500/+ paper pages of risk......

But on the positive side, they define ''a day/trading day'' as close to close+ some of those managers can , believe it or not,use some discretion, in addition to that.SO a 33.3%% loss could ,[ but almost impossible ]result in an ETF zero balance LOL. Even worse, a 33.3% gain , may/may not result in 100% in one year. NOT suitable for all investors,

 

[ironchef]

No, rebalancing a two-asset universal portfolio (levered QQQ and cash, which can be negative), in the absense of transaction costs (that's why RobinHood and MOC), should increase your absolute and perhaps also your risk-adjusted return.

Google the terms "volatility pump," "universal portfolio," and "Thomas Cover." Since you are taking an Excel VBA class, you might be interested in the vol pump excel/vba code posted on the archived Gummy Stuff website.

Ran some Excel backtests on SPY, levered SPY and rebalanced levered SPY. Outcome depended on luck:

If I started investing at the bottom of a bear market, levered SPY or rebalanced levered SPY outperformed SPY by a mile. On the other hand when I started at the peak I underperformed. In fact a levered SPY under some scenarios led to total wiped out. Rebalancing did avoid total wiped out or risk of ruin but it underperformed.

As someone told me: Don't confuse brains with the bull market.

I will read up on volatility pump next.

 

[clacy]

IMO, you can safely use leveraged ETF's (long term holds), but you should stick to equities and productive assets like REIT's, etc. I wouldn't touch some of the commodity leveraged ETF's.

If you're holding a leveraged equity ETF, you should probably use a 10 month SMA or something to filter out insane draw downs.

Long term moving averages do not necessarily increase CAGR performance, but can help protect you from deeper catastrophic DD's.

With that said, a 10 or 12 month SMA might keep you limited to a 20% DD on with 1x leverae, but that amplifies to 60% on a 3x ETF. Most normal retirees aren't able to stomach that.

 

[Kevin Schmit]

Ran some Excel backtests on ... rebalanced levered SPY. Outcome depended on luck ... I will read up on volatility pump next.

Since the vol pump dictates the rebalance and leverage levels, it might have been a good idea to read up on vol pumps before you ran your backtest, rather than after.

when I started at the peak I underperformed.

When you started at the peak you were negative leveraged, right?

Vol pump will add roughly sigma^2 / 2 to your expected return, so with long-run full-cycle average SPY vol around 20% that would work out to about 2% per annum at average 1x leverage. For the vol pump code to work with acceptable risk, you'll need to chose a target return that is reasonable and doesn't fall on the right side of the Kelly curve. 12.5% pa is a reasonable target nominal return for a levered SPY vol pump portfolio.

 

[ironchef]

Since the vol pump dictates the rebalance and leverage levels, it might have been a good idea to read up on vol pumps before you ran your backtest, rather than after.

Yes sir, I should not shoot and then aim.

It only took me 20 min to do a backtest on a rebalanced levered SPY. Basically I tested borrowed on margin and rebalanced monthly to hold the ratio fixed. Probably nothing to do with vol pumps.

 

[ironchef]

When you started at the peak you were negative leveraged, right?

Vol pump will add roughly sigma^2 / 2 to your expected return, so with long-run full-cycle average SPY vol around 20% that would work out to about 2% per annum at average 1x leverage. For the vol pump code to work with acceptable risk, you'll need to chose a target return that is reasonable and doesn't fall on the right side of the Kelly curve. 12.5% pa is a reasonable target nominal return for a levered SPY vol pump portfolio.

Nothing fancy, it was a simple 50% margin set up, just like any retails can get from any brokerage, but I rebalanced monthly to maintain the 50%, ignored commission and margin interest rate of course.

Actually I don't need to be a genius to know when I bought at the bottom and on leverage, my outcome would be far superior. The surprising outcome is rebalancing also reduced the risk of ruin.

From what I read, you could get similar results with two different equities instead of equity and cash?

Question: Why is it called volatility pumping?

 

[murray t turtle]

IMO, you can safely use leveraged ETF's (long term holds), but you should stick to equities and productive assets like REIT's, etc. I wouldn't touch some of the commodity leveraged ETF's.

If you're holding a leveraged equity ETF, you should probably use a 10 month SMA or something to filter out insane draw downs.

Long term moving averages do not necessarily increase CAGR performance, but can help protect you from deeper catastrophic DD's.

With that said, a 10 or 12 month SMA might keep you limited to a 20% DD on with 1x leverae, but that amplifies to 60% on a 3x ETF. Most normal retirees aren't able to stomach that.

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Good points. Also if one gets to be about 100, I would not do a 30 year mortgage.LOL…... OIL ETFs are more risky than stocks + pay no dividend/no earnings