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Old 26.11.2020, 00:37
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Leveraged ETFs

Has anyone had any experience with leveraged etfs?

I appreciate that performance will lag the multiple of the Index due to costs - but it seems like performance is still considerable. Eg sxpl (3x sp500) is up nearly 15 times in 10 years.

Do they have a place in a buy and hold long term strategy? Or is it a get rich quick scheme?
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Old 26.11.2020, 09:27
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Re: Leveraged ETFs

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Has anyone had any experience with leveraged etfs?

I appreciate that performance will lag the multiple of the Index due to costs - but it seems like performance is still considerable. Eg sxpl (3x sp500) is up nearly 15 times in 10 years.

Do they have a place in a buy and hold long term strategy? Or is it a get rich quick scheme?
In a really volatile market you could lose everything. I suspect this would have happened in 1987 & 2007 with 3 times gearing.

The other thing to remember EFT's can be shorted, & the short position could exceed the size of the EFT, as has happened by a factor of 10.
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Old 26.11.2020, 10:25
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Re: Leveraged ETFs

Also, volatility decay. Leveraged ETFs are not valid for long-term holding.

Also, think you can't lose everything? Think again.

‘Bankrupt in Just Two Weeks’—Individual Investors Get Burned by Collapse of Complex Securities
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Old 26.11.2020, 10:54
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Re: Leveraged ETFs

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Also, volatility decay. Leveraged ETFs are not valid for long-term holding.

Also, think you can't lose everything? Think again.

‘Bankrupt in Just Two Weeks’—Individual Investors Get Burned by Collapse of Complex Securities
https://www.cnbc.com/2018/02/14/cred...ty-trades.html
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Old 26.11.2020, 11:03
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Re: Leveraged ETFs

The other thing with synthetic EFT is counterpart risk, explained by Terry Smith.
https://www.investorschronicle.co.uk...K/article.html
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Old 26.11.2020, 11:50
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Re: Leveraged ETFs

i think it is a good principle to buy as simple/vanilla products as possible.
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Old 27.11.2020, 19:23
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Re: Leveraged ETFs

The problems with 3x long ETFs aren't the costs, it's volatility drag (also called volatility decay).

According to IB, and considering the splits but ignoring the payouts (less than $2 per share it seems), FAS gained something like 150% since its inception in October 2008. Meanwhile the underlying index (RIFIN, Russell 1000 financial services) went from 750-800 to ~1850. Of course a more focused subindex will exhibit higher volatility in many cases, but this example may give you an idea of the effects of a less-positive environment. IB refuses to chart RIFIN's historical volatility for me, but if memory serves option implied volatility for FAS was above 300% in early 2009, that indicates something above 100% for the underlying index as well.

Similarly, SPXL's theoretical gain over the last 10 years based on SP500's ~12% annualised return is halved by volatility. If you assume the same halving during more "normal" years that return 8% annualised (SP500's historical return adjusted to ~2% inflation), the same cut reduces SPXL's return over 10 years to SSO's, which uses only 2x leverage.

So, IMHO 3x long ETFs aren't worth the risk and pain from drawdowns. Not entirely sure whether 2x long are, but if anything I'd limit myself to 2x long, SSO doesn't deviate all that much from the theoretical/optimal return (based on SP500's annualised return).

SPXL, effect of volatility on 1-year performance, taken from the prospectus (p.6).
Prospectus: "The index's annualised historical volatility rate for the five year period ended Dember 31, 2019 was 13.43%":

Last edited by Urs Max; 27.11.2020 at 19:35.
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Old 27.11.2020, 19:45
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Re: Leveraged ETFs

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i think it is a good principle to buy as simple/vanilla products as possible.
Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
Warren Buffett agrees with you, Sir

I find hironic that people ask about leveraged products when the market reaches new highs rather than after a 30% crash
Besides, a person asking information about such securities on an Internet forum means he/she is not really aware of the risks:
“My partner Charlie Munger says there are only three ways a smart person can go broke: liquor, ladies, and leverage. Now the truth is – the first two he just added because they started with L – it’s leverage.”
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Old 27.11.2020, 20:10
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Re: Leveraged ETFs

Rule of thumb. Only buy what you understand.
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Old 27.11.2020, 20:50
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Re: Leveraged ETFs

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Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
Warren Buffett agrees with you, Sir

I find hironic that people ask about leveraged products when the market reaches new highs rather than after a 30% crash
Besides, a person asking information about such securities on an Internet forum means he/she is not really aware of the risks:
“My partner Charlie Munger says there are only three ways a smart person can go broke: liquor, ladies, and leverage. Now the truth is – the first two he just added because they started with L – it’s leverage.”
Better to ask questions on an internet forum first than buy without much appreciation of the risk/benefit balance! We've all got to start somewhere, and there's no shame in asking questions and looking into possibilities even if they turn out not to be clever options.

BTW - I wasn't remotely considering buying now, but rather whether I should next time there is a big crash. By the time of the crash its too late to educate yourself. (And even then I wouldn't go 3X.) By the sounds of it - it's probably better to go for a comparatively high risk high volatility option like Scottish mortgage rather than going for these ETFs.

Last edited by HickvonFrick; 28.11.2020 at 16:26.
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