Gyroscopic Investing

I am fascinated by leveraged ETNs such as UPRO, a 3X S&P ETN, and a new one, XXXX, a 4X S&P ETN. These supposedly aren't great long term because of "decay" which happens if the underlying index is moving up and down and essentially going sideways. If it goes up 10% one day, then the 4X will make it go up 40% that day. But then on the next day, if it goes back down to where it started, you lose money. Example, starting with $100. On day 1, S&P goes up 10% (not realistic but easy math), so with 4X leverage of XXXX, you have $140. On day 2, S&P goes down 11%, which puts it back to where it started on day 1. The 4X will bring it down 44% for day 2. Your account balance is $78.40. You're down 22.6% while the index is unchanged.
I read about a strategy of shorting both the long and inverse leveraged ETN, which allows you to cash in on the volatility. But shorting has costs so it's not necessarily a great strategy. Any other strategies on how to profit from leveraged ETNs or avoid the "decay" issue?

jason wrote: ↑Fri Dec 08, 2023 4:49 pm I am fascinated by leveraged ETNs such as UPRO, a 3X S&P ETN, and a new one, XXXX, a 4X S&P ETN.

While I'm not interested in leveraged products, if I where to choose one, it would never be an ETN. ProShares UPRO does appear to be a standard ETF. This new XXXX offering from BMO is an Exchange Traded Note where you are at risk of the issuing company going bankrupt and becoming just another creditor in line. Regular ETFs and Mutual Funds do not have this credit risk.See the Selected Risk Considerations at bottom of https://www.bmoetns.com/ page.

Credit Risk of Bank of Montreal - The ETNs are unsecured debt obligations of the issuer, Bank of Montreal, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payments you are entitled to receive on your ETNs, including any payment at maturity, call or redemption, are subject to our ability to pay our obligations as they come due. As a result, the actual and perceived creditworthiness of Bank of Montreal will affect the market value, if any, of the ETNs prior to maturity, call or redemption. In addition, in the event that Bank of Montreal was to default on its obligations, you may not receive any amounts owed to you under the terms of the ETNs.

supposedly a leveraged 60/40 can deliver the performance of 90-100% equities but with less risk .

but is it true in practice or is it another situation of looking good in theory and on paper but with hidden dangers ?

so tried a small allocation today .

this would be a do it yourself version

20% UPRO, a 3X leveraged S&P 500 fund
13.33% TYD, a 3X leveraged Intermediate-Term Treasuries fund
66.67% in DBMF managed futures fund

so bought

246 shares dbmf 27.01
40 shares upro 49.85
51 shares tyd. 26.23

for more info on this read here

https://www.riskparitychronicles.com/te ... ged-60-40/

we have had some interesting conversation on using leveraged portfolios to reduces risk and increase gains ..

and noooo this isn’t about using margin or mortgage money ..

borrowing money and just buying more of a 60/40 only buys a bigger 60/40 . but it is still a 60/40 with all the draw down and gain limitations on a 60/40 .

buying more of just a particular holding then changes the allocation and is no longer a 60/40/.

so these leveraged efficient portfolios are done using derivatives, futures contract and options to create more power in what appears to be the same 60/40 allocation but on steroids .

there are quite a few different models out there .

these can be easily created today using the many leveraged funds out there .

leveraged meaning , thru various products if the market moves 100 points you move 200 or 300 points

couple that with risk parity assets and you can get some pretty wild results

i am experimenting with the carolina reaper version .

i will call it experimenting more then investing since i only committed 10k to it to see how it behaves

it consists of 3 etfs


20% UPRO, a 3X leveraged S&P 500 fund

13.33% TYD, a 3X leveraged Intermediate-Term Treasuries fund

66.67% in the aforementioned DBMF

there are other models

wisdom tree has one that mimics the work of cliff asness


WisdomTree’s US Efficient Core Fund (NTSX) is essentially Asness’s idea in investable form.

NTSX combines a 90% position in the S&P 500 and uses the remaining 10% to take positions in future contracts on various types of Treasuries designed to resemble a 60% allocation to bonds. NTSX is then a 1.5X leveraged fund that should act like a 90/60.


There's a little nuance to this portfolio, though, since it is “capital efficient,” which is the ability for an investment strategy to gain exposure to a particular market while using fewer assets. An investor could go all-in with NTSX, or else devote just $66.67 of actual money to mimic the performance of $100, which would then you give you an additional slice to allocate somewhere else.

These days, a 66.7% allocation to NTSX combined with 33.3% in iMGP DBI’s Managed Futures ETF (DBMF) is gaining a lot of traction and press as a quick and easy way to create a capital-efficient take on the 60/40 that gives you the extra boost of whatever your managed futures strategy can deliver on top of what you would have gotten from the 60/40.

Corey Hoffstein is often credited with this portfolio idea, though when I reached out to him, he also gave credit to Jake (@EconomPic) and the real person at Unrelated Nonsense, whose actual name I don’t know. This NTSX/DBMF combo is also reminiscent of the “return stacking” idea advanced by Hoffstein

so here is a little back test on the versions above along with the original article

https://www.riskparitychronicles.com/te ... ged-60-40/

i just went as far back with these funds as i could in portfolio visualizer. first time running it myself .

i was able to go back to jan 2020 , so almost 4 years

a 60/40 consisting of 60% voo (s&p fund )and 40% bnd ( total bond fund ) took 100k and turned it in to 126,130 , a cagr of 6.11%

the 60/40 carolina reaper took a 100k grew it to 136,260 ,a cagr of 8.22%

BUT GET THIS

WORST DOWN YEAR WAS MINUS 2.57% for the reaper with a worst draw down of 9.45%

the conventional 60/40 had a worst year of minus 16.16 % and a worst draw down of 20.15%

HOLY CRAP , WHAT A DIFFERENCE .

Boy this is showing a lot of promise as we went thru some awful times as well as high inflation and rising rates.

it really wants to compel one to go whole hog but i don’t have the balls yet. lol

but it certainly looked like that magical portfolio we all dream about if we don’t want 100% equities

i mean down a mere 2.57% …that’s incredible while a 60/40 was down 16.16% , yet beat it by over 2% in gains

for comparison to the permanent portfolio .

the pp grew 100k to 11,202 , cagr of 2.94% , worst year down 13.85 and worst draw down 17.20%

doing the first monthly rebalancing on the carolina reaper leveraged portfolio..

the managed futures fund dbmf is flat , have to add a bit to tyd and upro the 3x funds .

i find its best to rebalance these highly leveraged funds once a month .. its easiest to add a little bit of money instead of selling if this is a relatively smaller experimental position.

adding 330 dollars to upro and 75 dollars to tyd .

even though this is a 50k position the moves are definitely well tempered considering it uses highly volatile 3x leveraged funds .


it is supposed to give you the performance of a 60/40 with a fraction of the volatility and draw down .

we will see about that but so far volatility has been pretty benign considering the moves are multiplied 3x by tyd a leveraged bond etf and 3x by upro the market etf combined with a managed futures etf that goes short and long.

while the etfs make it simple to do , what goes on behind the scenes in these etfs makes my hair hurt its so complex to understand ..but no need to if it works