tbh im still hesitant on leveraged etfs, even on cycle lows i gotta do some work on it to feel more comfortable as entry point is very crucial and im still not convinced that holding it throughout the entire cycle is optimal.
length of cycle, volatility of cycle can vary and there is divergence in returns for “similar” products that keep me away. reading it is 1 thing and gives me the idea, but i have to go through the data to find everything i need to know.
conventional norm on levered etfs is that its only good for trades, and not long term buy and hold. the concept of 2x as the optimal leverage is new to me. so i definitely learned something worthwhile. SSO seems like the best etf among the rest too. given the volume, aum, and fees. also is there a 1.5x with enough volume?
as far as margin goes. ibkr margin loan from 0 to 100k is 3.2% before a tax deduction, but i expect rates to ramp up to 5% in a couple years as well as markets in general tanking pretty soon so that is a recipe for disaster. additionally most my $$ are tax deferred or tax free accts so i couldnt even margin if i wanted to
I first thought Ohai was crazy for touting long term leveraged etfs positions, but maybe he’s on to something. There has to be a optimal leverage ratio for your portfolio, why assume it’s zero? I think people blew off leverage before due to the margin cost – would make sense to apply 50k in margin to 100k portfolio if you’re paying 6% interest rate? Derivatives maybe, but the transactional costs and time consumption for rebalancing doesn’t make sense for portfolios that size. So maybe the best advantage of the leverage etf isn’t for day-to-day trading but for a cheap and easy source of financing over the long term. For me 2 to 1 just feels high, I think 2 to 1.5 would handle swings better but good luck marketing that product.
Similar to all this, I once heard that Buffet wasn’t exactly the best stock picker he just outperformed due to the inherit leverage he applied to BRK from his insurance business.
There are a couplee economists that show up every so often to explain how our risk aversion is why leverage is so low, even at institutional levels. They calculate the ideal amount that would have historically never had a margin call. They also discuss how borrowing on margin is actually less risky (as defined by ending balance), because you are evening out somewhat the cash flows between young and old you.
I’ve never heard the etfs pitched as a good idea. Always heard they had high fees and such. I’m definitely looking into it.
BTW aqr has a paper that breaks buffets returns down to factors. Leverage explains a part but his stock picking is still better than average
Arguments like high fees are valid, but ultimately, what matters is the quantitative effect of all factors. The 1% ish expense ratio on something like SSO is much higher than that of a normal SPX fund. However, the positive returns have generally overwhelmed the cost.
agreed with ohai. fees of 1% is de minimis. if you time it right, the annual return is theoretically double, so say the median is 10%, and you time it as median performance, you would get 20%, you’d still 19% for that year. and thats just the median.
on tax deferred/free accounts, you are not allowed to go on margin. leverage etf is prolly a good way to circumvent those rules. plus you can move in and out tax free. on taxable accounts going on margin on regular etf makes more sense.
there isnt enough real data on this. what is the oldest leverage etfs?
SSO started in 2006 or so. Life to date, it has beaten SPTR by some 1.5% annually. Keep in mind that this period contains the 2008 crash, which is essentially a once-a-generation, era defining event.
If you had entered the SSO position in 2009, you would have beat SPTR by over 10% returns a year - basically, you’d have made double SPTR’s return, which is what the product is supposed to do.
Thanks for the advice in this thread. Couple of questions though. How much should I invest to start trading? Does anyone have any short beginner guides they can PM me?
Ok, so VOO has been slowing down and I sold to lock in the gains, don’t think I’ll have taxes. I bought a dash cam, but otherwise keeping the proceeds. Keep the tips coming! Or, just buy VOO again? How will politics affect VOO?