Author Topic: leveraged etfs under performing in a bull market. Why?  (Read 1653 times)

stahleyp

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leveraged etfs under performing in a bull market. Why?
« on: January 10, 2020, 06:02:31 AM »
So I was looking at different levered etfs (upro vs spy) and the results are what one  (roughly) expects. UPRO is 3x  (daily) returns so over the past 10 years or so it averaged about 38% vs a little less than 15% for SPY.

If you look at EFA vs  DZK over the roughly 11 years, DZK comes out at 6.69% vs 7.22% for EFA. So it's been a bull market and the 3x etf actually underperformed (with substainlly higher drawdowns).

The expense ratios on DZK and UPRO aren't huge (about .2% difference) but I was surprised at the results.
Paul


muscleman

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #1 on: January 10, 2020, 06:15:36 AM »
So I was looking at different levered etfs (upro vs spy) and the results are what one  (roughly) expects. UPRO is 3x  (daily) returns so over the past 10 years or so it averaged about 38% vs a little less than 15% for SPY.

If you look at EFA vs  DZK over the roughly 11 years, DZK comes out at 6.69% vs 7.22% for EFA. So it's been a bull market and the 3x etf actually underperformed (with substainlly higher drawdowns).

The expense ratios on DZK and UPRO aren't huge (about .2% difference) but I was surprised at the results.

These 3x are only good for holding short term. You shouldn't consider holding them for 10 years.
The reason is because they adjust the leverage ratio daily to keep it 3x.
For example, if you enter a period of choppy up down market.
Let's give a more extreme example to make it clearer: it is up 10% first day, down 10% second day, up 10, down 10.......
Then at the end of first day, it has to increase the leverage by 10% to keep it 3x. So as soon as it increased the leverage by 10%, the market is down 10% next day, so at the end of next day, it has to decrease leverage by 10%, which is also the exact wrong time as it is up 10% again the 3rd day....
So if you hold SPY unleveraged, after 4 days, you are break even, but if you hold 3x leverage, after 4 days, you have 130% * 70% * 130% * 70% = 0.82, so you just lost 18% of your money in 4 days.

Of course if the market is in an up streak, then you'll do extremely well, but up streaks are very rare and usually short even in greatest bull markets.
I am muslceman. I have more muscle than brain!

stahleyp

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #2 on: January 10, 2020, 06:44:04 AM »
thanks for the explanation, muscle. This might sound silly but if you bought and sold it everyday (sell at close and rebuy at open), would you then get the 3x? I'm assuming the adjustments are made at night. Obviously, it wouldn't work out perfectly since the market doesn't reopen at the same level but I wonder if it would work out well enough.
Paul

cherzeca

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #3 on: January 10, 2020, 10:55:44 AM »
muscleman explains this well above, but 3x etfs can perform very well in good markets.  compare FAS (96% gain over 1 year) to XLF (26% gain over 1 year).  just have to have conviction going into it and figure out when to pull the ripcord

stahleyp

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #4 on: January 10, 2020, 11:15:40 AM »
I was thinking of having a strategy of something like 1/3 UPRO and 2/3 BND. If another 2008 happens, you'll limit your downside to less than 33% on the stock side while still getting the upside of 100% stock. I guess the issues becomes how choppy the returns are and the bond market also dropping.
Paul

cherzeca

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #5 on: January 10, 2020, 11:22:00 AM »
I was thinking of having a strategy of something like 1/3 UPRO and 2/3 BND. If another 2008 happens, you'll limit your downside to less than 33% on the stock side while still getting the upside of 100% stock. I guess the issues becomes how choppy the returns are and the bond market also dropping.

it is an interesting idea, but I confess I dont understand credit markets anymore, since when sh*t hits fan, equities go south as expected, but everyone flocks to FI, yields go down and you suffer principal impairment. without having researched it, I would be more inclined to hedge with GLD.  others may disagree

Orchard

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #6 on: January 10, 2020, 11:29:47 AM »
I was thinking of having a strategy of something like 1/3 UPRO and 2/3 BND. If another 2008 happens, you'll limit your downside to less than 33% on the stock side while still getting the upside of 100% stock. I guess the issues becomes how choppy the returns are and the bond market also dropping.
if you want to take a long-term levered position leaps are the better way to go.

StevieV

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #7 on: January 10, 2020, 11:42:41 AM »
thanks for the explanation, muscle. This might sound silly but if you bought and sold it everyday (sell at close and rebuy at open), would you then get the 3x? I'm assuming the adjustments are made at night. Obviously, it wouldn't work out perfectly since the market doesn't reopen at the same level but I wonder if it would work out well enough.

Are you asking whether you would then get 3x on a yearly or multiple year basis?  If so, no.  You get the same thing 3x the daily move.  All you miss out on is the change from the close to the open.

jobyts

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #8 on: January 10, 2020, 04:21:47 PM »
One idea I keep thinking but never got time to try on the historical data is, to dollar cost average a 3X index. Has anyone done the analysis, and care to share the finding?

cherzeca

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Re: leveraged etfs under performing in a bull market. Why?
« Reply #9 on: January 10, 2020, 05:38:41 PM »
One idea I keep thinking but never got time to try on the historical data is, to dollar cost average a 3X index. Has anyone done the analysis, and care to share the finding?

great idea.  but the 3x etf compounds daily in essence. isn't that dollar/cost averaging built in?