^ thread Quarantined section ^ what’s most incredible about this chart to me is that every winter mortality rises like 20-25% vs the preceding summer. If you didn’t know that we had covid in 2020 already, you wouldn’t even suspect anything other than an especially bad winter.
Author of the leveraged ETF article, thought I'd respond to the four comments:
0) Firstly would like to mention I am *not* suggesting everyone/anyone buy these. I'm just mentioning them, since people are often surprised they exist and have been curious about them. Retail investors would also do well by learning about futures and options (perhaps LEAPs, definitely not OTM weeklies..), among many other things, but it doesn't mean they need to use them! I did add that anything more than daily usage of leveraged ETFs is controversial and often discouraged even among many highly-financially-literate groups, and there's obviously reasons for that.
1) Leveraged ETFs have a target of 2/3X the underlying index's performance daily, and they usually match this very well (just about as well, proportionally, as traditional ETFs match their underlying). Volatility drag is *much* more important of a downside for potential long-term usage, and I tried to give it a lot of space in the post as a result.
2) I wasn't intending to be misleading here (after all I have zero vested interest), but I do think it's still pretty important to note the difference between having someone else take out a loan and betting on them versus taking out the loan yourself, especially when the other party does it as their primary business model. It's easy to buy a few shares and know it won't affect the rest of your portfolio, and it's much easier to burn yourself hard by leveraging up with portfolio margin.
3) I mostly agree with this, which is why I don't want to suggest or guarantee anyone would make anything (the 'not even notice' case is in the most optimistic bullish scenarios, e.g. the last 10 years). Also very correct that there's better options, namely futures, but those seem more difficult for casual investors to manage properly
Either way I do always try to discourage things like trading, timing the market, short-term bets, technical analysis, and so on. LEAPs are definitely imo a very good option for those looking for better risk/reward as well as futures. Appreciate the feedback!
The real reason you shouldn't invest in leveraged ETFs is that they're return 2x the Daily return each day and not the 2x return for when you bought them. This leads to "Vol Drag/chop loss/volatiltiy decay" where if the market goes up 10% then down 9% in a normal index youd have 100 to 110 to 100.1 while if each daily move is doubled its 100 to 120 to 98.4. Your issue is (1+2x)(1-2x) < 1.
The reason its not a 2x total return is because for example: on day 1 you put up 100 of your cash and borrow another 100, and youve got 200 worth of stock. In a year stocks are up 50%, and the total investment is 300, you share is 200 plus the borrowed 100. But now you're only 50 percent leveraged: if on the 1st day of year 2 the market returns 1%, you get $3 divided by your 200 stake or 1.5%. If it was a total return the leverage ratio would change every day and that's not useful to think about, a "leveraged etf" whose leverage varys.
Call options aren't traded based on growth but on the future volatility of the market (google "Black Scholes delta hedging") so there's not extra expected value from being "more long" the market.
If you're going to buy stocks on margin note that Charled Schwab charges about 6% which is enough to remove any expected value, this is in line with other large asset managers, but you might have better luck searching explicitly for low interest margin loans.
Author of the leveraged ETF article, thought I'd respond to the four comments:
0) Firstly would like to mention I am *not* suggesting everyone/anyone buy these. I'm just mentioning them, since people are often surprised they exist and have been curious about them. Retail investors would also do well by learning about futures and options (perhaps LEAPs, definitely not OTM weeklies..), among many other things, but it doesn't mean they need to use them! I did add that anything more than daily usage of leveraged ETFs is controversial and often discouraged even among many highly-financially-literate groups, and there's obviously reasons for that.
1) Leveraged ETFs have a target of 2/3X the underlying index's performance daily, and they usually match this very well (just about as well, proportionally, as traditional ETFs match their underlying). Volatility drag is *much* more important of a downside for potential long-term usage, and I tried to give it a lot of space in the post as a result.
2) I wasn't intending to be misleading here (after all I have zero vested interest), but I do think it's still pretty important to note the difference between having someone else take out a loan and betting on them versus taking out the loan yourself, especially when the other party does it as their primary business model. It's easy to buy a few shares and know it won't affect the rest of your portfolio, and it's much easier to burn yourself hard by leveraging up with portfolio margin.
3) I mostly agree with this, which is why I don't want to suggest or guarantee anyone would make anything (the 'not even notice' case is in the most optimistic bullish scenarios, e.g. the last 10 years). Also very correct that there's better options, namely futures, but those seem more difficult for casual investors to manage properly
Either way I do always try to discourage things like trading, timing the market, short-term bets, technical analysis, and so on. LEAPs are definitely imo a very good option for those looking for better risk/reward as well as futures. Appreciate the feedback!
For a better explanation of why leveraged etfs are a away to lose your money to vol loss see https://mobile.twitter.com/HedgeDirty/status/1257287089042984961 or read below.
The real reason you shouldn't invest in leveraged ETFs is that they're return 2x the Daily return each day and not the 2x return for when you bought them. This leads to "Vol Drag/chop loss/volatiltiy decay" where if the market goes up 10% then down 9% in a normal index youd have 100 to 110 to 100.1 while if each daily move is doubled its 100 to 120 to 98.4. Your issue is (1+2x)(1-2x) < 1.
The reason its not a 2x total return is because for example: on day 1 you put up 100 of your cash and borrow another 100, and youve got 200 worth of stock. In a year stocks are up 50%, and the total investment is 300, you share is 200 plus the borrowed 100. But now you're only 50 percent leveraged: if on the 1st day of year 2 the market returns 1%, you get $3 divided by your 200 stake or 1.5%. If it was a total return the leverage ratio would change every day and that's not useful to think about, a "leveraged etf" whose leverage varys.
Call options aren't traded based on growth but on the future volatility of the market (google "Black Scholes delta hedging") so there's not extra expected value from being "more long" the market.
If you're going to buy stocks on margin note that Charled Schwab charges about 6% which is enough to remove any expected value, this is in line with other large asset managers, but you might have better luck searching explicitly for low interest margin loans.