20% annual returns over 40 years...interested?

[Kbg]

I've mentioned this several times but I will reiterate. Make sure you understand the math of leveraged ETFs and imagine one of the assets you are short has several years of a very good run. But if it isn't clear lets do this example.

Imagine an asset moves a factor of two.

If it goes against you and you are long you are wiped out.  If it goes against you and you are short you have lost 2x  your starting point (probably more because of 3x ETF leverage). If you do a 3x ETFs PP you can estimate scenarios and what will happen. If you buy short ETFs and short them, I would spend a lot of time in the asset price history books.

Or something real...imagine being short SGLD from Oct 2008-Oct 2011; DGP had a 500%+ run. Conservatively that would have been 750% for UGLD...and you want to be on the flip side of that???

Seriously...make sure you understand the math of all this.

[jason]

I've mentioned this several times but I will reiterate. Make sure you understand the math of leveraged ETFs and imagine one of the assets you are short has several years of a very good run. But if it isn't clear lets do this example.

Imagine an asset moves a factor of two.

If it goes against you and you are long you are wiped out.  If it goes against you and you are short you have lost 2x  your starting point (probably more because of 3x ETF leverage). If you do a 3x ETFs PP you can estimate scenarios and what will happen. If you buy short ETFs and short them, I would spend a lot of time in the asset price history books.

Or something real...imagine being short SGLD from Oct 2008-Oct 2011; DGP had a 500%+ run. Conservatively that would have been 750% for UGLD...and you want to be on the flip side of that???

Seriously...make sure you understand the math of all this.

I was discussing shorting the inverse ETFs, which means I would be long.  Inverse ETFs move in the opposite direction of the index. So, if you short DGLD and gold goes up 2% in one day, your investment will increase by 6% that day.  Shorting inverse ETFs is almost the same thing as owning the bull ETFs. But some people say the decay is better if you short the inverse ETF.

[Kbg]

I'm quite aware of what you were discussing, but respectfully, I submit you are not thinking this one through. I hope you will do so a little bit more. I would also suggest you Google up stock lending fees.

[jason]

I'm quite aware of what you were discussing, but respectfully, I submit you are not thinking this one through. I hope you will do so a little bit more. I would also suggest you Google up stock lending fees.

I'm trying very hard to think this through, but I'm very confused about the decay issue.  Decay seems like it can either hurt or help, depending on the path, but it's a wildcard.  And some people claim that by shorting inverse ETFs, you can overcome the decay issue and make it work in your favor.  There is almost nothing online regarding this topic, and since these ETFs haven't been around that long, it's hard to draw conclusions based on a few years of history.  I think I need to find a mathematician to figure this thing out.

[dragoncar]

I'm quite aware of what you were discussing, but respectfully, I submit you are not thinking this one through. I hope you will do so a little bit more. I would also suggest you Google up stock lending fees.

I'm trying very hard to think this through, but I'm very confused about the decay issue.  Decay seems like it can either hurt or help, depending on the path, but it's a wildcard.  And some people claim that by shorting inverse ETFs, you can overcome the decay issue and make it work in your favor.  There is almost nothing online regarding this topic, and since these ETFs haven't been around that long, it's hard to draw conclusions based on a few years of history.  I think I need to find a mathematician to figure this thing out.

Just simulate some paths that add up to zero return in the underlying index and se how you feel about the results for long 2x or short -2x.  Simple excel or pen and paper will do.

[Kbg]

I'm quite aware of what you were discussing, but respectfully, I submit you are not thinking this one through. I hope you will do so a little bit more. I would also suggest you Google up stock lending fees.

I'm trying very hard to think this through, but I'm very confused about the decay issue.  Decay seems like it can either hurt or help, depending on the path, but it's a wildcard.  And some people claim that by shorting inverse ETFs, you can overcome the decay issue and make it work in your favor.  There is almost nothing online regarding this topic, and since these ETFs haven't been around that long, it's hard to draw conclusions based on a few years of history.  I think I need to find a mathematician to figure this thing out.

There is no way to know what the decay is going to be as it is path dependent. *The* issue to be worried about for a 3x ETF PP is trending. Most of what you are reading is assuming shorter term holds and everything you read says to never hold these things long term...facts:

Since SPXL's first day of trading in 2008

SPY: +144%
SSO: +332%
SPXL: + 509%

From Mar 1 2009
SPY: +203%
SSO: +615%
SPXL: + 1354%

If you would have nailed the exact low in Mar 09...336%/883%/2022% respectively

With regard to performance Jan 2012 to yesterday

25% each to DGLD, TMV, SPXS with 25% in cash (short short ETFs)

Qtrly Hold: 13.29 CAGR/-28.72% DD
Annual Hold: 10.75 CAGR/-28.95% DD

25% each to UGLD, TMF, SPXL with 25% in cash (buy long ETFs)

Qtrly Hold: 12.06 CAGR/-24.10% DD
Annual Hold: 16.90 CAGR/-20.63% DD

Of note, from Apr-Jun 2013 DGLD was completely wiped out. My backtester terminates the loss at 100%. In real life, a backtester doesn't terminate a short loss at 100%. The loss is as high as the asset increases. In this case the actual damage would have been a bit more but not too much.

At the end of the day I do not believe the risk is worth shorting and clearly longs do their job in a trending market...have I said that phrase "in a trending market" enough? Cuz if it ain't one then all your decay nightmares come true.

[Kbg]

I forgot to mention one thing in my last post. One of the reasons the shorting performance is worse is because you are turning the math that can benefit you on its head. Instead of the mo expanding your profitable run to get exponentially larger, shorting does the exact opposite and each day up gets incrementally smaller.

[jason]

I'm quite aware of what you were discussing, but respectfully, I submit you are not thinking this one through. I hope you will do so a little bit more. I would also suggest you Google up stock lending fees.

I'm trying very hard to think this through, but I'm very confused about the decay issue.  Decay seems like it can either hurt or help, depending on the path, but it's a wildcard.  And some people claim that by shorting inverse ETFs, you can overcome the decay issue and make it work in your favor.  There is almost nothing online regarding this topic, and since these ETFs haven't been around that long, it's hard to draw conclusions based on a few years of history.  I think I need to find a mathematician to figure this thing out.

There is no way to know what the decay is going to be as it is path dependent. *The* issue to be worried about for a 3x ETF PP is trending. Most of what you are reading is assuming shorter term holds and everything you read says to never hold these things long term...facts:

Since SPXL's first day of trading in 2008

SPY: +144%
SSO: +332%
SPXL: + 509%

From Mar 1 2009
SPY: +203%
SSO: +615%
SPXL: + 1354%

If you would have nailed the exact low in Mar 09...336%/883%/2022% respectively

With regard to performance Jan 2012 to yesterday

25% each to DGLD, TMV, SPXS with 25% in cash (short short ETFs)

Qtrly Hold: 13.29 CAGR/-28.72% DD
Annual Hold: 10.75 CAGR/-28.95% DD

25% each to UGLD, TMF, SPXL with 25% in cash (buy long ETFs)

Qtrly Hold: 12.06 CAGR/-24.10% DD
Annual Hold: 16.90 CAGR/-20.63% DD

Of note, from Apr-Jun 2013 DGLD was completely wiped out. My backtester terminates the loss at 100%. In real life, a backtester doesn't terminate a short loss at 100%. The loss is as high as the asset increases. In this case the actual damage would have been a bit more but not too much.

At the end of the day I do not believe the risk is worth shorting and clearly longs do their job in a trending market...have I said that phrase "in a trending market" enough? Cuz if it ain't one then all your decay nightmares come true.

Is decay just as likely to help you as hurt you? Or, over time, will it usually hurt performance? I know it depends on the path, so I am wondering if there is a pattern to the path that stocks usually take, and if decay has more often helped versus hurt performance, historically. 

[Kbg]

Is decay just as likely to help you as hurt you? Or, over time, will it usually hurt performance? I know it depends on the path, so I am wondering if there is a pattern to the path that stocks usually take, and if decay has more often helped versus hurt performance, historically.

I've provided you everything you need to focus your study in order to make an educated decision on whether this is right for you or not. If the main pointers were not clear, let me recap the areas for additional study.

- Path dependency...what is it? What are the implications?
- The exponential nature of daily leveraged returns and losses over time
- A trend (or non trend) and its implications for daily rebalanced leveraged returns
- Brokerage borrowing costs for leveraged short ETFs
- How the mathematics of leveraged ETFs is altered when shorting vs. being long
- The perils of shorting in general

Here's your fishing pole, time to fish for yourself.

Best wishes and good luck.

[MachineGhost]

I'm confused. If you are planning on doing this entirely from within an IRA, what difference does it make what the 'tax consequences' are? You can buy and sell and reinvest or not 'til the cows come home, and the only tax concern is the ordinary income tax rate you will pay when you withdraw any money from the IRA. If it's a traditional IRA, all withdrawals are fully taxable at your marginal rate. If it's a Roth IRA, none of the withdrawals are subject to tax of any kind as long as the contributions have been in it for at least 5 years.

Some investments are not appropriate for retirement accounts, such as MLP's where you can get with with the Unrelated Business Income tax penalty or some shit like that.

[MachineGhost]

Thank you.  Does anyone have any suggestions regarding how rebalancing should be done?  It's going to be a 33/33/33 (UPRO/UGLD/TMF) portfolio. What rebalancing bands should I use?  Should I just rebalanced annually?

If you don't want 75%+ maximum drawdowns, I suggest halving the traditional bands by 1/3rd.

[MachineGhost]

It's not really clear, but I think they are saying the decay will work in your favor, rather than against you, if you short an inverse ETF.  I really don't follow how that would work, though, as I don't think the article explains it clearly.  Can anyone put that in terms that I can understand?
Also, since you can't short ETFs in an IRA, this would have to be done in a taxable account.

It's exploiting the roll yield from one month to another in futures or swaps.  The problem is good luck finding any shares to short.

[Kbg]

Is decay just as likely to help you as hurt you? Or, over time, will it usually hurt performance? I know it depends on the path, so I am wondering if there is a pattern to the path that stocks usually take, and if decay has more often helped versus hurt performance, historically.

I've provided you everything you need to focus your study in order to make an educated decision on whether this is right for you or not. If the main pointers were not clear, let me recap the areas for additional study.

- Path dependency...what is it? What are the implications?
- The exponential nature of daily leveraged returns and losses over time
- A trend (or non trend) and its implications for daily rebalanced leveraged returns
- Brokerage borrowing costs for leveraged short ETFs
- How the mathematics of leveraged ETFs is altered when shorting vs. being long
- The perils of shorting in general

Here's your fishing pole, time to fish for yourself.

Best wishes and good luck.

More like here's your fishing line, make sure you don't hang yourself with it.

I had two thoughts responding to this thread. These things are highly volatile and quirky, accordingly someone should really spend time learning before investing their hard earned money. The second thought was Dude! It's freaking 2% of your portfolio and in the big scheme of things isn't going to matter much.

[jason]

I've provided you everything you need to focus your study in order to make an educated decision on whether this is right for you or not. If the main pointers were not clear, let me recap the areas for additional study.

- Path dependency...what is it? What are the implications?
- The exponential nature of daily leveraged returns and losses over time
- A trend (or non trend) and its implications for daily rebalanced leveraged returns
- Brokerage borrowing costs for leveraged short ETFs
- How the mathematics of leveraged ETFs is altered when shorting vs. being long
- The perils of shorting in general

Here's your fishing pole, time to fish for yourself.

Best wishes and good luck.

More like here's your fishing line, make sure you don't hang yourself with it.

I had two thoughts responding to this thread. These things are highly volatile and quirky, accordingly someone should really spend time learning before investing their hard earned money. The second thought was Dude! It's freaking 2% of your portfolio and in the big scheme of things isn't going to matter much.

It's a big portfolio. 2% represents over $100,000.  So, it's not a decision I take lightly.

[Kbg]

More like here's your fishing line, make sure you don't hang yourself with it.

I had two thoughts responding to this thread. These things are highly volatile and quirky, accordingly someone should really spend time learning before investing their hard earned money. The second thought was Dude! It's freaking 2% of your portfolio and in the big scheme of things isn't going to matter much.

It's a big portfolio. 2% represents over $100,000.  So, it's not a decision I take lightly.

Well then I'll paraphrase HB...don't invest in something you aren't comfortable with and there is never an investment decision that can't wait. I would spend some personal time with the six bullets I listed above before committing.

[dragoncar]

So is the bottom line that this will work very well if daily volatility is low, and very poorly if daily volatility is high?  And recently daily volatility has been low, so it's worked?

[Kbg]

So is the bottom line that this will work very well if daily volatility is low, and very poorly if daily volatility is high?  And recently daily volatility has been low, so it's worked?

It's all about the trend my friend. Volatility is fine if the thing trends, and not good if something isn't trending. There is no great surprise that back and forth volatility is not a good thing and exacerbates the affect of decay. From the opening of trading this year until today.

1x PP: 2.81%
3x PP: 8.27%

Decay -.16%

The most "non-trendy" has been SPY/SPXL

SPY - 1.68%
SPXL - 5.67%

Decay - .63%

The most trendy has been TLT/TMF

TLT - 6.72%
TMF - 20.84

"Positive Decay/Undecay?" + .68%

I have posted numerous examples on this that are fact based performance results. I can't tell you what a 3xETF is going to return a year out anymore than I can tell you what a 1xETF is going to return. What I can say is that if the thing trends you are going to get more than a 3x return on the upside and less than the equivalent draw down on the down side.  Simple simulation:

50 Days Straight up
1% Daily Return = 62.8% return
3% Daily Return = 325.6% return (5.18x the juice)

50 Days Straight down
-1% Daily Return = -38.8% return
-3% Daily Return = -77.5% return (1.99x the juice)

Hit the rebalance button and you are still up 2.5x. This is very, very good math to have on your side.

Now of course if all three assets all decide to go down, it isn't going to be fun. But just for fantasy fun...can you imagine having owned a 3x gold etf from 1978 to 1980 and rebalancing annually? The returns would have simply been breathtaking and if your portfolio would have had any size at all you would have become quite wealthy.

The hard thing to know is what would happen in one of those go nowhere PP years? A 3x could be worse or it could be better. We just don't know. We only have one year of history 2013 where the normal PP (using ETFs) returned -2.37% while the 3x version returned .35%. And the very simple reason for this is the undecay factor of the leveraged S&P500 out powering the combined negative effects of LTT and gold going down.

[dragoncar]

So is the bottom line that this will work very well if daily volatility is low, and very poorly if daily volatility is high?  And recently daily volatility has been low, so it's worked?

It's all about the trend my friend. Volatility is fine if the thing trends, and not good if something isn't trending. There is no great surprise that back and forth volatility is not a good thing and exacerbates the affect of decay. From the opening of trading this year until today.

1x PP: 2.81%
3x PP: 8.27%

Decay -.16%

The most "non-trendy" has been SPY/SPXL

SPY - 1.68%
SPXL - 5.67%

Decay - .63%

The most trendy has been TLT/TMF

TLT - 6.72%
TMF - 20.84

"Positive Decay/Undecay?" + .68%

I have posted numerous examples on this that are fact based performance results. I can't tell you what a 3xETF is going to return a year out anymore than I can tell you what a 1xETF is going to return. What I can say is that if the thing trends you are going to get more than a 3x return on the upside and less than the equivalent draw down on the down side.  Simple simulation:

50 Days Straight up
1% Daily Return = 62.8% return
3% Daily Return = 325.6% return (5.18x the juice)

50 Days Straight down
-1% Daily Return = -38.8% return
-3% Daily Return = -77.5% return (1.99x the juice)

Hit the rebalance button and you are still up 2.5x. This is very, very good math to have on your side.

Now of course if all three assets all decide to go down, it isn't going to be fun. But just for fantasy fun...can you imagine having owned a 3x gold etf from 1978 to 1980 and rebalancing annually? The returns would have simply been breathtaking and if your portfolio would have had any size at all you would have become quite wealthy.

The hard thing to know is what would happen in one of those go nowhere PP years? A 3x could be worse or it could be better. We just don't know. We only have one year of history 2013 where the normal PP (using ETFs) returned -2.37% while the 3x version returned .35%. And the very simple reason for this is the undecay factor of the leveraged S&P500 out powering the combined negative effects of LTT and gold going down.

Makes sense, thanks.  When you at 3x was .35% in 2013, that includes expenses right?  I understand expense ratio is baked into ETF price but kick me if I'm wrong

[Kbg]

These are dividend split adjusted returns so yes baked in. I will find some examples of where decay leverage was harmful due to non trending by way of full disclosure. My quess at a fast food restaurant this morning is that IWM/TNA will be a good demo. Will post this afternoon.

[MWKXJ]

I've been following this thread off and on for months and am curious how the 2x and 3x funds would react to rising interest rates.  Would decay increase dramatically should interest rates rise?

Sorry if this sounds elementary but I'm trying to recap my understanding of the 2x and 3x funds in the manner of a 5-year-old ( ELI5 ).  What we're actually purchasing here is a share of a asset (LTT, S&P 500, Gold) that's been purchased by someone else (ETF underwriter) with a loan, correct?  The 2X and 3X indicate how aggressive of a loan the ETF underwriter have taken.  This presumably affects the interest on the loan, and hence the expense of the ETF.  In other words, I've been assuming that the decay is factored into the listed expense of the fund (it may be somehow "hidden", I don't know).  Is this correct so far?  In regards to the loan used by the ETF underwriter to purchase said assets, what is the duration?  Daily?  If so, wouldn't rising interest rates be the Achilles-heel of this scheme?; one is increasing their share of Permanent Portfolio assets while moderately or greatly increasing interest rate risk (among other risks)?

The past decade has been marked by low interest rates and the 2X and 3X funds are based on loans.  Have these funds been tested with higher interest rates?

[Kbg]

M...

You sir are a glutton for punishment. Might I introduce you to the exciting world of financial swaps. I refer you to the search engine of your choice and recommend "ETFs swap based" as your search. The Vanguard paper is pretty good.

The short answer is, not counting the normal impact of interest rate changes on assets, not much.

Anyone considering a 3xETF PP should probably do the above. It's always good to know what is under the hood.

[dragoncar]

M...

You sir are a glutton for punishment. Might I introduce you to the exciting world of financial swaps. I refer you to the search engine of your choice and recommend "ETFs swap based" as your search. The Vanguard paper is pretty good.

The short answer is, not counting the normal impact of interest rate changes on assets, not much.

Anyone considering a 3xETF PP should probably do the above. It's always good to know what is under the hood.

Ok a little google ing explains some.  As far as I can tell a swap is just a contract.  But who would promise s&p returns in exchange for the interest on a floater so account?  Is it just the inverse/short/hedgers who are taking the other side? 

If th interest rate goes up, then you are mostly losing the opportunity cost on your collateral?

[Kbg]

Another good one...this one gets into the mechanics a little better. I don't think I would invest in an ETF that did swaps for obscure stuff, but I'm not particularly concerned with swaps on US LTTs, the S&P500 or gold.

http://www.horizonsetfs.com/Pdf/Educati ... d_ETFs.pdf

More 3x ETF performance vs. underlying

http://seekingalpha.com/article/2854476 ... -past-year

[Kbg]

And now for that not so good example of 3xETF behavior.

2014

IWM: 5.30%/12.7%DD

TNA: 6.02%/35.79%DD

Awesome...none of the out performance with pretty much every bit of the draw down.

If we extend the backtest out to yesterday

1.82 vs -5.06%

More awesomeness...the underlying is positive and we lost 3.78x

However...and the exact reason why I'm doing this.

From Jan 2104 to today...

TMF has returned 3.99x TLT and what is even more cool, the comparative max DD was 2.92x. The first part of this sentence was to be expected, I don't think I've ever seen the second half.

So let's do a little more math here...

If I had a PP of just IWM/TNA/TLT/TMF since 2014

3xETF is up 154.80%
1xETF is up 41.79%

Cool...net leverage was 3.7x, just what we expect to see

But let's cut our initial investment by 2/3 to deleverage our leverage (i.e. a lot more cash)

We find out return is 51.59%

Hmmm....51.59-41.79...well holy cow that equals 9.8 percentage points of out performance

[stone]

Kbg, isn't it true that if the asset classes are keeping to a trend, then the (internally daily adjusted) 3xETFs + cash (so deleveraged to be back to 1x but not rebalanced every day) will out perform the 1xETF whilst if the asset classes are whipsawing, then the 3xETF + cash will suffer?

Was mid 2011 a time when the 3xETF + cash strategy would have performed badly due to all of the assets whipsawing to and fro with no consistent trend?

Sorry if I'm in a muddle / being stupid etc -I haven't followed this thread.