Double long (leveraged) and Triple long (leveraged) funds...

[moneymaker]

Hi all,

I think we can all agree that this forum very much supports the idea of index investing because of the low expenses and that it's nearly impossible to "beat" the broad market. Because of this forum, I am now mostly an index guy myself after years of individual stock picking (The indexes have beat me over the long term)!

Anyway, it's also gotten me thinking about how most everyone on here doesn't believe in timing the market, so just continue to invest in indexes and let it ride.

Well, my question is if the market as a whole and over the long term does well, why not invest in double or triple leveraged funds/etfs? Rather than averaging an 8% return a year, you could get 16% or even more....Serious question, I understand that yes, on the down years, you'll lose double/triple, but most folks on here, will tell you to never sell anyway and invest for the long term.

Looking forward to hearing your thoughts....by the way, i'm 33 years old.

 

[OrcasIslandBound]

The key word is volatility. Even 60 - 80% stocks would generate too much volatility for my family's comfort level. Leveraging stocks like what you are proposing kind of makes it so that you have 100 - 150% in stocks. Fine if you're OK with the resulting volatility. Look back to 2008 to see how the funds handled the crash. But, on the plus side, Warren buffet routinely does what you are proposing.

Sent from my Nexus 4 using Early Retirement Forum mobile app

 

[MRG]

Understand how these double and triple ETFs price before you hand your money over.

 

[REWahoo]

The key word is volatility.

+1

Leveraged funds are only for those with lead-lined guts.

 

[moneymaker]

+1

Leveraged funds are only for those with lead-lined guts.

I understand the volatility piece, but the market is volatile as well, but still continues to drive forward. So if most people on this board are set on staying the course and continuing to invest, with the assumption that the market over the long term, will generate decent returns, why not maximize that with leveraged funds?

 

[Dash man]

A lot of "what ifs" to consider. What if there is a prolonged market downturn ( think Japan). Will a leveraged ETF be able to survive?

 

[moneymaker]

A lot of "what ifs" to consider. What if there is a prolonged market downturn ( think Japan). Will a leveraged ETF be able to survive?

Agreed. But for folks here, will you continue to stay in the market and index in index funds in a prolonged market?

 

[REWahoo]

So if most people on this board are set on staying the course and continuing to invest, with the assumption that the market over the long term, will generate decent returns, why not maximize that with leveraged funds?

Based on the last bit of 'market unpleasantness' in 08/09, it was highly stressful for those of us who stayed the course to do so and see our portfolios decline by 40% or more. No way would I have wanted to go through that experience holding leveraged funds. I'm sure I would have sold at some point only to regret it later.

Slow and steady wins the race.

 

[38Chevy454]

Slow and steady wins the race.

X2, plus greed makes a person do dumb decisions.

The added volatility is certain, and each person has different tolerance. The basic premise is increased risk will give increased return, just be aware that risk is minimized by retirees. As OP is only 33, you can handle the longer term swings with time to recover.

 

[wingfooted]

You don't want to be long leveraged ETf's in a time frame other than short term and as a trading vehicle.

The reason is fairly obtuse but the gist of it is that leveraged ETF's rebalance themselves on a daily basis. Thus they are selling when the price goes down and buying when the price goes up - on a daily basis. In any kind of flat or choppy market this will result in a serious balancing decay over a period of weeks or months.

You would be far better off using a margin account to leverage a normal ETF or shorting the leveraged fund itself - for example if you want to go long a leveraged ETF , short the leveraged inverse fund - if the shares are available to borrow of course.

So unless you have a need to trade in the short term, or are shorting the inverse position, and know exactly what you are doing - stay away from leveraged ETF funds.

 

[bumtrader]

Well, my question is if the market as a whole and over the long term does well, why not invest in double or triple leveraged funds/etfs? Rather than averaging an 8% return a year, you could get 16% or even more....Serious question, I understand that yes, on the down years, you'll lose double/triple, but most folks on here, will tell you to never sell anyway and invest for the long term.

I've traded SSO (2x leverage of SPY) in the past to increase my return. However, you do not want to hold these long term because of slippage. Here is a real example of what can go wrong (see link at bottom). If you had bought a 2x leveraged S&P 500 in January of 2009 and held it for 6 months the leveraged fund lost money even though the S&P 500 return was 3.16% over the same time frame.

https://www.tradeking.com/education/etfs/leveraged-and-inverse-etfs

 

[mrfeh]

Agreed. But for folks here, will you continue to stay in the market and index in index funds in a prolonged market?

How would that leveraged portfolio have fared in 2008?

The market can remain irrational longer than you can remain solvent.

 

[MRG]

You don't want to be long leveraged ETf's in a time frame than short term and as a trading vehicle.

The reason is fairly obtuse but the gist of it is that leveraged ETF's rebalance themselves on a daily basis. Thus they are selling when the price goes down and buying when the price goes up - on a daily basis. In any kind of flat or choppy market this will result in a serious balancing decay over a period of weeks or months.

You would be far better off using a margin account to leverage a normal ETF or shorting the leveraged fund itself - for example if you want to go long a leveraged ETF , short the leveraged inverse fund - if the shares are available to borrow of course.

So unless you have a need to trade in the short term, or are shorting the inverse position, and know exactly what you are doing - stay away from leveraged ETF funds.

Thank you. I thought this was common knowledge. Excellent explanation!☺

 

[karluk]

I looked into leveraged ETFs when they were fairly new and also came across the standard advice to avoid them except for short term trading. However, this advice may not be all that accurate. Here is a recent article that takes a more nuanced view of buying and holding leveraged ETFs for long periods.

http://finance.yahoo.com/news/different-view-double-leveraged-etfs-153046779.html

In my view, this article gives plenty of fodder to both advocates and detractors of long term holding of leveraged ETFs. On the positive side, there are real life examples of leveraged ETFs that have returned far more than their promised leverage over multi-year holding periods. Quoting from the article:

The ProShares Ultra S&P 500 ETF (SSO) , which attempts to deliver twice the daily returns of the S&P 500 index, is up 209% over the past five years, or nearly triple the returns of the S&P 500 over the same period.

On the negative side, backtesting a hypothetical 2x S&P500 ETF over the period 1951-2014 beat the S&P 500, but by far less than the doubling of returns that might have been expected. To me that would be a fatal flaw. If I take twice the risk, I should be rewarded with twice the profit, not less.

 

[haha]

I understand the volatility piece, but the market is volatile as well, but still continues to drive forward. So if most people on this board are set on staying the course and continuing to invest, with the assumption that the market over the long term, will generate decent returns, why not maximize that with leveraged funds?

None of us are brave enough. We are likely just a bunch of fuddy duddies.

The

 

[duggy]

I agree with wingfooted. I've learned from personal experience during the 2008 crash with leveraged latin america mutual funds.

Here's a simplified example. Say u invest $100,000 into a 3x ETF of the SnP.(market price of $100 a share). If the market corrects by 30%, ur investment will drop to $10,000(market price - $10 a share). U will basically be wiped out. I think most people understand this risk.

BUT, the real issue is believing that as the market rebounds, you will recoup you $100,000. This may or may not happen. So as the SnP recovers by 42%, the market will be exactly back to where it was before the 30% crash. Back to even. However, your 3x etf investment will only be worth (42%x3)126% higher from the $10 market price per share. Thus, your investment will only be worth $22,600. U will still be down HUGE, even tho the market has fully recovered.

Leveraged etf's are not long term, set it and forget it investments.

 

[ownyourfuture]

A lot of "what ifs" to consider. What if there is a prolonged market downturn ( think Japan). Will a leveraged ETF be able to survive?

I think Dash Man made the best points so far.

The Nikkei Average is less than half what it was 25 years ago.

I understand that between 1965 & 1980, the major US averages went nowhere. Would a leveraged etf have survived ?

I remember Joe Kernan from CNBC, telling what it was like working at a brokerage in early 1980. He said that "no one was buying stocks, no one was selling stocks, no one even wanted to talk about stocks"

Compare this to now.

 

[nun]

Well, my question is if the market as a whole and over the long term does well, why not invest in double or triple leveraged funds/etfs? Rather than averaging an 8% return a year, you could get 16% or even more....Serious question, I understand that yes, on the down years, you'll lose double/triple, but most folks on here, will tell you to never sell anyway and invest for the long term.

Looking forward to hearing your thoughts....by the way, i'm 33 years old.

You also have to consider income generation. If you retired into a bear market and lost 2 or 3 times the actual decline and then had to take income it could be nasty.

 

[Totoro]

If I would do this (and I won't), I'll likely make it more explicit: borrow money and invest it in the stock market, pocket the difference in return.

Or go bankrupt when the bank comes calling ..

 

[Travelwanted]

Hi all,

I think we can all agree that this forum very much supports the idea of index investing because of the low expenses and that it's nearly impossible to "beat" the broad market. Because of this forum, I am now mostly an index guy myself after years of individual stock picking (The indexes have beat me over the long term)!

Anyway, it's also gotten me thinking about how most everyone on here doesn't believe in timing the market, so just continue to invest in indexes and let it ride.

Well, my question is if the market as a whole and over the long term does well, why not invest in double or triple leveraged funds/etfs? Rather than averaging an 8% return a year, you could get 16% or even more....Serious question, I understand that yes, on the down years, you'll lose double/triple, but most folks on here, will tell you to never sell anyway and invest for the long term.

Looking forward to hearing your thoughts....by the way, i'm 33 years old.

There is decay in trading these. They are meant as short-term hedges or bets only. They are NOT appropriate for most investors and never appropriate long term.