Investing With Leverage (Borrowing to Invest, Leveraged ETFs)

What do you do if you are not concerned with volatility, and are willing to take on even more risk than the stock market has to offer? There are two options: reducing diversification, or using leverage.
References in this episode:
- Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk: papers.ssrn.com/sol3/papers.c...
- Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio: www.amazon.ca/Lifecycle-Inves...
- Embedded Leverage: docs.lhpedersen.com/EmbeddedLe...
- Why Do Most Investors Choose Concentration Over Leverage?: www.aqr.com/Insights/Research...
- Leveraged ETF Rebalancing: An ETFdb.com Guide: etfdb.com/leveraged-etfs/unde...
Path-Dependence of Leveraged ETF Returns: www.math.nyu.edu/faculty/avel...
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[@mohitsahu4647]

yor ability to hold your eybrows up for long durations is phenomenal

[@TheAvtrey]

I'm dead hahahahahaha!

[@WPaKFamily]

your*

[@alexhetu6242]

😅😂

[@zacharyscott387]

This can't be unseen

[@k24hybrid]

😂😂😂😂😂😂

[@thestrappingentrepreneur2822]

Holy crap the first non biased view on leverage omg

[@andreasisaakme]

True!

[@chriswantstomakeit]

You need to be high risk when you are young, obvious isn't it? When are you going to do it, when you are 55? I am wary of a depression though.

[@thestrappingentrepreneur2822]

Agreed I use leverage but I don’t use margin

[@thinstitute]

Who cares about drawdowns? Pros and pessimists only look at short term incidents, and advise against this to cover their asses. Over the very long-term, such leveraged ETFs return much more if you can focus on what you started with, and not what you've gained, or how little you gained over the short term. People panic because they don't remember or record their initial investment (lose track of initial amounts and/or don't keep track of long-term charts, etc.). As long as you pick ETFs that have returned fairly steadily over the long-term (i.e: NASDAQ 100 and S&P 500), you just have to hold on and always remember your initial amount, and not what you have at the present time, because that will change and/or go down drastically. If you're making monthly contributions, chart those as well, and prediction charts over the long term. And you'll see that you'll end up a winning over 7, 10, 15, 20 or even 40 years. We're all "short-term" creatures and it's why this looks scary and always has such warnings by advisors in order to cover their asses. Personally I prefer 2x (QLD) over 3x (TQQQ), my heart can only handle so much! And the 43% yearly long-term return with QLD (over the last 10 years, even through major pandemic crash) is certainly adequate. HQU is the Canadian version of QLD. For Canadians, use the WealthSimple broker (WealthSimple.com) which charges 0% commission on all trades. It's great. Use code UEE9DA to get $10 free from WealthSimple when you trade 100$ or more. Best broker for Canadians!

[@MStar10]

@@chriswantstomakeit what's not so obvious is for a youngster to use leverage - which is the point of the vid. There many ways to take on higher risk. I think borrowing to invest is not talked about enough.

[@BrentRoss]

dave ramsey has left the chat

[@superflyp0]

Brent Ross ahh haha

[@Thurgor_Supreme]

Dave is great for getting debt junkies out of debt, but he's a con artist when it comes to investing advice.

[@BrentRoss]

Thurgor Supreme well if you had leverage you sure are feeling it now lol

[@itsatrap7215]

@@BrentRoss Depends. You can use a 3x leverage account but only invest 1/3 of your equity in it to receive similar returns as 100% in equity without risking as much capital. Very contingent on how people are using it.

[@utkarsh12]

@@Thurgor_Supreme yeah i saw one his videos where he was yelling for 10 minutes straight about being frugal. Can't take advice from someone who can't talk like a normal person

[@HamiltonRb]

Speaking of concentrated leveraged investing, I always try to keep my Vanguard portfolio as far away as possible from my Caesars Palace portfolio I call it my sleep at night portfolio.

[@daryla1019]

Thank you so much Ben for presenting both sides of the coin and not outrightly lambasting leveraged ETFs. Absolutely love your evidence-based approach

[@TheMrMikeo]

Mate you just kill it! Such articulate and researched work!

[@ZelenoJabko]

Wow, you really went in depth. This is so rare to see.

[@martydelaney]

Hadn't heard of leveraged investing before and this was very informative. Thank you so much for making these understandable and fascinating videos.

[@clockywork]

This is a superb video. I'm 20% through the book you mentioned (Lifecycle investing - 2 Yale Professors) and came to watch a video on more of the same subject while I was eating. You did an excellent job in referencing the studies and sources, and the video is well edited. I have subscribed.

[@arthurobrien7424]

As someone who is decades away from retirement, this is really interesting to know. Wouldn't go all in with my knowledge, though.

[@sdzbwxp]

Tax can play a big part in leverage investment. Say a home owner makes good employment income, and is at 50% marginal tax bracket. He can borrow against his home equity at 4%. Given the interest is tax deductible, the effective cost of borrowing is only 2%. I agree that the key is to stay invested for a long period of time.

[@CanaldoHolder]

Another great video! 🚀🚀

[@BenFelixCSI]

Thanks Fabio!

[@ildefonsovilar]

That's how i build two solid portfolios. A growth/ tech portfolio and a DGI portfolio.. using leverage. I'm so grateful for the access to margin...

[@mangoh69]

Ben, you are hands down the greatest finance / investing expert on KZbin. Thanks for the accessible videos that still have a great amount of breadth. Always appreciate the reference to academia / empirical studies as well. If I lived in Canada and not the US I’d definitely retain you and your firm’s services because of these videos - savvy business move!

[@joelongweichen]

Excellent video, especially that last bit on leveraged ETFs. I learned the hard way how significant time decay can be a few years ago. Keep up the great videos.

[@roz1052]

Thank you for this video. Video kind of says what i'm thinking but would never dare tell any of my family members or friends.

[@jordanlaboucane3215]

Clear, concise and a rational reminder as always.

[@oGrasshoppero]

Have been holding long on 3X leveraged ETFs since 2009. I retired in 2021 at the age of 43...thank you leverage.

[@commonsense-og1gz]

did you dollar cost average, or did you follow some other process?

[@oGrasshoppero]

@@commonsense-og1gz I used my own "weighted" dollar cost averaging approach through my most recent buy into SOXL maxing out in Oct 2023. Basically divided all my cash into 52 equal parts with a schedule to buy in once a week for a year. However, if the price was lower than the previous week, I bought twice as much as the previous week. If the price was higher than the previous week, then I would reset the amount back to scheduled allotment.

[@Carlos-kv6hx]

Thank you for the videos. Very educational. Can you do one on option strategies? Covered calls etc...

[@Outta12]

Ok. You reeeeeeeeeally added value with this video!!! Subbing!!!

[@BenFelixCSI]

Thanks!

[@m.morininvestor9920]

Value premium still exist! 😊

[@fakedlie123]

Once again a very educational video!

[@Eduard338]

this is very good one. i was thinking about leveraging myself - didn't do it in the end :-)

[@flurinjenal374]

Why not?

[@robertmaxwellproduce]

Great video man! No bullshit just straight facts. I subbed after watching the first 150 seconds

[@mikep4869]

I see several very smart CFP's coming out of the Lower Mainland in B.C. Your videos are 'no-selling' knowledge packages. They are great! Please keep them up.

[@rolandoafender]

Hey question, could you create a video on your day to day roles & operation as a portfolio manager? What you do entirely?

[@Nuganics]

Decay is real so great to see that mentioned. Also won't returns also be less than expected as dividends are not included in the leveraged part of ETF? With the high expense and behaviour problems I can't see them as practical for most investors.

[@alecubudulecu]

love your videos.. good stuff.... you have a great way of explaining complex topics in a simple manner that is easy to understand., but also you go into depth on topics that I find I already know... so i'm always learning. plus you project well and good audio. (I listen to you while at gym or driving... so audio is more important than what people show in the videos to me)

[@BenFelixCSI]

Thanks! If you prefer audio I wonder if my podcast would also be useful to you. It's longer and unscripted (so less structured). rationalreminder.ca/podcast-episodes

[@shallow33]

Can't the "negative exposure to variance in returns" be offset by some clever options trades like an iron condor? If so, why don't leveraged ETFs do this?

[@samersarhan]

Thanks Ben. Very helpful as usual. Can you please do one video on leveraging using LEAPS call options?

[@MyFinancialFamily]

What a great channel Ben! Glad I found your channel, learning lots

[@GubeTube19]

For the lady point you made: how can "embedded leverage" of a leveraged ETF be "priced in"? How is it priced in? What does this mean in this context?

[@chrisjokinen217]

Was looking for a video on this topic from you a week ago, couldn't find it you so I read the book. Just finished yesterday, very interesting strategy, I have started applying it.

[@BenFelixCSI]

Awesome. I have not applied it personally but it is something that I consider often. What are you using to access leverage?

[@chrisjokinen217]

@@BenFelixCSI in my stable growth account though a bank broker I am using a Margin account for 2:1 leverage with the stocks as security. In my high growth/high risk account I use CFDs for 5:1 leverage, these are a base buy and hold position with day trades around the central position.

[@kevinforward3249]

Ben, excellent as usual.. please consider a video on covered calls.

[@BenFelixCSI]

Thanks! Covered calls limit your upside. Yes, you get some extra income, but if we are operating on the assumption that stocks have positive expected returns you are giving up some of that expected upside by selling calls. The strategy also affects the distribution of outcomes, where you have limited upside but maintain all of the downside (less the option premium). The strategy is also tax inefficient due to the added income from option selling. Maybe a video eventually.

[@Pancho117]

Fantastic video as always

[@BenFelixCSI]

Thanks!

[@nathanmorris6928]

Great video Ben. I have a question around brokerage risk. I’m young and want to add some moderate leverage to my long term investing. Interactive brokers has margin rates in the 1.2-1.5% range. This is less than a mortgage and 1/4 or 1/5th of what other brokerages are offering with similar balances, margin requirements and fees. I’m worried I am missing something here. Is there something like the CDIC to protect my funds should brokerage go bankrupt ? Do I own my shares outright or is there some measure of brokerage risk I can weigh in my decision? Thank you !

[@HC351]

Thank you for this video. As a follow up, what are your thoughts on risk-parity strategy (which utilizes leverage to hit home on the central idea in this video) and other similar leveraged funds, such as WisdomTree's 90/60 fund and PIMCO's StockPlus series funds? These strategies generally utilizes 130% to 150% leverage, do not rebalance daily, and generally have max loss at 100% of investment. Are these sound strategies?

[@WorldWideRide2012]

Well researched and presented as usual Ben. Key take away for most novice investors and perhaps even the "pretending" pros should be the theme of behaviour (separate video perhaps?). After eleven years of a one-way bull market with only very brief corrections, I'm hearing a lot of brave talk about leverage and inappropriate portfolio risk. My response to this crowd is always a simple question "were you buying stocks in late 2008 and into 2009?" If no, then leverage has no place being in your portfolio. Always lots of bravado in a bull market and this one is a beauty. Happy Holidays

[@gameplays811]

I think your'e making a point about behavioral factors, which I agree with, but a leveraged investor should be selling stocks after a crash to avoid being over leveraged right?

[@bedehenderson8414]

Thank you so much. Great video!! I've been thinking about leveraging my ETF portfolio for about the last couple of years. I thought it would be a good idea, but I also knew I needed to do a fair bit of research first; otherwise I'd feel like I'm going into it a bit blind... I've been putting off doing this research, as I'm busy working full time and studying towards the CA designation. Now I have a summary of your expert opinion, and some excellent references to academic literature - exactly what I needed!! Thanks again, Ben! Your channel is excellent

[@BenFelixCSI]

That's great! I'm glad it was helpful.

[@yojmb9]

Ben, nice video. what do you think about using options yourself to generate leverage? isn't that what you say the ETFs do, why not us? would make a great video how to obtain say 130% or 2x leverage on SPY using options.

[@kevc8607]

Thank you so much! What a great video. What are your thoughts on buying XGRO on margin for a long time horizon (20y+)? I will add funds to avoid a margin call. I do not own a home so I don't have access to low rates of a HELOC. I suppose it will be unregistered since I don't gain any of the tax benefits of borrowing to invest in a TFSA.

[@brydensears6318]

Great video

[@JSyntax]

Great videos! Can you speak to CANADA have the highest amount of house hold debt for a developed country? Also the Toronto condo market? A lot of your videos consider homes for all of Canada but I feel like Toronto downtown condos are very different in terms of maintenance

[@NorskKiwi]

Great video as always Ben. Listened to my first episode of your podcast the other day too (GJ on the catch up info, seems I tuned in at the right time).

[@BenFelixCSI]

Thank you! Also thanks for tuning into the podcast!

[@DrBandaKhalifa]

subscribed. amazing content

[@lionsden3437]

Great video!!!

[@smithle3436]

Great video. Recently started using a heloc to buy index fund VGRO shares. Let's see where this ends up decades down the road.

[@joehostile4541]

How did it work out the last 8 months?

[@lucamaurelli5877]

Thank you so much for the valuable information. I hope my leveraged gratitude is not already priced in the common words I used. I'm not a native English speaker. 🙏🙏🙏

[@robocop581]

Good points

[@InStyle9]

Hi Ben, care to elaborate a little bit on Emerging Markets in one of your future videos? Thanks in advance!

[@Lysergesaure1]

Futures contracts usually are the cheapest way to increase gearing. Very good liquidity and the interest rate is baked into the price, usually closely follows the 3-month rate.

[@BenFelixCSI]

If I were to use leverage in my personal portfolio I'd be deciding whether to use margin or futures. The downside of futures is that I could not get exposure to my current portfolio (which I have deemed to be optimal for me). That would be an important compromise to consider. If I use margin I can maintain exposure to the assets that I want.

[@djayjp]

It's all about the magic of an RRSP top up/catch up loan. I just got an RBC one for prime + 1.5% unsecured. Can be up to 50k.

[@BLR1GBattlemaster]

There are boglehead folks who are trying this leverage strategy using ETF's combined with some all weather Dalio mix. However, for folks thinking this is a good idea, just look at foreign markets with US based ETF's and leveraged ETF products. INDA and INDL is an example. You would have been screwed with INDL even though INDA has had a positive 10 year return. In a sideways market, time decay creates losses. In a downward market, leverage works both ways and can completely wipe you out. Anyways, really good video. Perhaps the most concise and accurate portrait of using leverage.

[@739jep]

Would you consider investing in rolling leap options to be a sensible way to leverage a long term portfolio?

[@Daniel7681]

In my opinion the only concern in Canada is the variable interest rate nature of something like a HELOC. If rates rise significantly for whatever reason (inflation being a probable one) stocks would likely fall & interest only payments on something like a HELOC may become too significant for the borrower, creating a need to sell the securities at an unideal time. In the US where you can lock in a rate for 30 years this may not be an issue but in Canada this would greatly increase your risk if I’m understanding this correctly.

[@Vitlaus]

Wish I heard this getting out of high school . . . Oh well

[@MStar10]

Thanks for the great video. What are your thoughts on leveraging at 4% int (td margin acct) and investing in something like Canoe EIT. UN that's yielding 10%+. Seems like a steady set of holdings and net return of approx 6%. Am I missing something? Thanks for your help

[@princeaah]

Hey Ben, as always well researched video. A few questions for you: 1. What are your thoughts on the Smith Maneuver? 2. Can the HELOC portion be still callable if you are locked into a 3 year fixed mortgage (BMO Homeowner Readline as an example)? 3. Lastly, I know that the yield curve has been inverted since August of 2019 (I think) and I know this question is alluding to timing the market, but for leveraged investing, would it be prudent to wait it out until the next crash occurs?

[@John-yk4bp]

What about leveraging by buying index futures and keeping them rolling, and not go for interest payments

[@RicardoHernandez-zr1pw]

I like selling puts and calls on the leveraged ETFs. I don’t worry about the time decay too much. I see the long term effects for the leveraged ETFs affect portfolios after one year of holding yet you can still get great results regardless.

[@geoatherton5214]

Hey Ben, love the channel and your comprehensive teaching style, you are my favorite source for learning this subject matter. Video topic requests: 1) can you please do a video about ESG and SRI investing? I want to shift my portfolio to better align with my morals, and divest from fossil fuels, for example. I want a more educated perspective on balancing the intent to maximize returns, with the intent to support ethical companies and causes. 2) What are some principles for designing an age-based portfolio allocation (USA/domestic market + international markets, etfs vs bonds, etc). Is it reasonable to pick about 4-6 ETFs that cover those bases? Glad to see your channel growing and thriving, thanks and keep up the great work.

[@BenFelixCSI]

Thanks! I am currently working on an ESG/SRI video.

[@DaniilKononenko]

Could you please make video about CAPE and shifting weights of countries in the portfolio according to it?

[@BenFelixCSI]

I touched on that here kzbin.info/www/bejne/rZDEgHiIorqKmqM

[@KarlosSacramento]

What are your thoughts on using 6-18 month options on index values? They don't seem to have the same mid to long-term drawback as leveraged etfs of the same indices while still being useful for young investors. I'm thinking of allocating ~10-15% of my investments as a spread of small investments in several options with differing maturing periods. I believe they can produce consistent leveraged returns with short periods of leveraged losses inbetween recession cycles.

[@adonisds]

That's a video I always wanted to see. Thank you very much. Can you also make a video about shorting?

[@BenFelixCSI]

Excellent. Shorting is a possibility but not currently on the list of upcoming topics.

[@adonisds]

​@@BenFelixCSI Great! There are short biased ETFs, right? Also, does shorting also always have positive expected returns? I really haven't even started studying this subject, I plan to. But I imagine if you are shorting a $30 stock, you're not gonna bet that it's gonna be less than $30 months from now with more than 50% probability, that seems insane. You would bet that it's gonna be less than $34 or something like that

[@BenFelixCSI]

Shorting can be expensive to maintain a position and it has unlimited downside. Scary stuff.

[@julienlefebvre3561]

If I'm ready to take on a lot of risk, what would be the issue with investing in 40% 3X S&P etfs and 60% 3X treasuries? Such as 40% UPRO and 60% TMF?

[@georgesondergeld3304]

Hello Ben! Any good total world etfs that are 3x leveraged? Would a 10-20% allocation be ok if you are ok with lots of risk? Combine it with 30% snp small cap value etf, 20% msci total world etf, 10% in a China/emerging markets eft and the rest in a good Australian index (I'm Aussie)? Sound good or crazy? Love your videos! Thank-you for all your information!!

[@napalm8030]

I did simulations on 10 different 3x leveraged ETFs over 10 year periods, including purchasing in 2007, and as long as you didn't sell during a large correction, the returns always outperformed their unleveraged counterparts, and usually to an astoundingly large degree. This is very interesting and tempting findings for me, as we eventually move forward from this current pandemic in the future..

[@BenFelixCSI]

Simulations or observing 13 years of past data? The market has had an unprecedented rise since 2007 in terms of returns and risk-adjusted returns, so looking at leveraged ETFs over that period could be misleading. In a volatile or down market leveraged ETFs could be ugly.

[@napalm8030]

@@BenFelixCSI Right yes. Sorry, historical data. I did calculations of 5 to 10 year returns based on purchasing them since their inception, and they outperformed even when one bought them at the worst possible time, right before the financial crisis. We had had an unprecedented bull run yes, but it seems if one could stomach the volatility, assuming the fund doesn't get wiped out or anything, one could do quite well. I'm not saying someone should go 100% into a 3x leveraged semiconductor ETF, but a small sized portion of capital allocated, after a large pullback like we have seen, into a leveraged S&P 500 ETF looks like it actually could be quite promising.

[@geotech8071]

@@napalm8030 I agree with your idea: to get in after a large pullback. What did you learn (e.g. size of position, re-balancing, ...), if you actually used this strategy in the last two years.

[@mephistomdc6476]

@@BenFelixCSIrisk adjusted return is bullshit idiot i became a millionaire due to leverage etfs I average on the down with qld and I try to buy upro when spy breaks 200 day moving average and some gold crosses . This idiot just sites academia like an idiot hedge funds on average beat the market before fees . Top 50 funds outperform after fees long term before fees the number is crazy ex, de shaw average roi net of fees is 15 and it charges 3-30 befor fees is like 25-27 percent plus for class a shares . Ben is just not educated enough in finance . Hell I bet he doesn’t have access to high tier prime brokers like ubs Neo etc . He just sites broke dumb professors who can’t even afford a Bloomberg terminal and credible education management system . I beat the market every year . It’s easy it’s just difficult when you mange 100 million plus because of slippage wide spreads etc even with block orders there is no such thing as arbitrageurs professors are just broke and stupid

[@jim171]

Looking at NTSX and other wisdom tree core efficiency funds, wpuld that be embedded leverage? Thoae seem to apply a safe optimized risk portfolio and leveraging them in a very cost efficient manner. May only be us market only. I'd love thoughts on those! Love your work. I've watched like 25 videos this week alone.

[@739jep]

How might one approach rebalancing if they’re using leverage? What are the considerations anyways.

[@SmackusMaximus]

A bit off-topic question (but I can't find that info in your ETF videos): Ben, what are the risks of investing into security-lending ETFs (if any)? What about lending your own assets via broker (eg. InteractiveBrokers's "Stock Yield Enhancement Program")?

[@johnpreston230]

I am re watching all Ben's videos. He is a Jedi Master.

[@axa3547]

So I use leverage like this I use very small portion of my capital for leverage but I keep on diversified with leverage in other assets sometimes I hit stop loss but I use that again with leverage

[@keilansnider1805]

Could you do a video the technical breakdown about the different types of leverage? Such as the daily breakdown of the loan from a margin account, a personal loan, and any other types of non-mortgage types of leverage offered by banks.

[@msharno]

How about using options of index funds as a way of leverage?

[@jul059]

Can we carry forward the tax deduction of the interest paid on borrowed money? Or is it refundable?

[@iamDeej]

Is it possible to circumvent the time decay by buying the leveraged etf anew every morning and selling it at the end of the trading day ?

[@Ruffian144]

So Ben, how much leverage in a fund is too much leverage?

[@andrewmitchell7592]

I am viewing TMF currently. What is considered a long-term hold on these leverage positions/typically too long on average? Does safety change at all when you are viewing a 20 year bond etf versus others? And I understand that nothing is guaranteed thank you for the insight.

[@MrHT-ii2ie]

Love your videos! In other videos you mention average market returns are around 6%. If you have access to capital for any rate less than 6% would you suggest leveraging, or would there be some minimal difference in the two rates you would suggest?

[@lukwe2929]

Tried to simulate it and you do need a spread. I'am unsure how to calculate it though and although i tried to dig into it I didnt come up with a good solution. I build an excel tool with historical data and tried to simulate it, but I only found decent Index Data that goes back to 1978. I will try go ahead an redo it in python to get better statistical results... I hoped to get more input from here...

[@zhongmingwu]

can you do a video on expected bond fund returns? i know that bond securities are supposed to be less volatile. when i look at the performance of bond funds (vbmfx e.g) what should i be comparing against? it does not appear that it's better than keeping it in a saving account? how about tax efficiency of bonds vs cash?

[@BenFelixCSI]

This has a good discussion on estimating expected returns: www.pwlcapital.com/wp-content/uploads/2019/03/PWL-WP-Kerzerho-Bortolotti-Great-Expectations-2019.pdf

[@brunomanco7529]

I was preparing this for 2 years, acumulating to buy a bunch of my favorite utilities, doubling the invedtement with leverage, and paying out with the dividends. Then this hapened and i had to maintain that cash to sustain my business

[@mariomatejka]

Ben, I would like to hear your thoughts on tax deductible mortgage plan (Smith Manoeuvre), since this video discusses both using home as leverage and tax deduction on borrowed money.

[@BenFelixCSI]

We discussed it in a recent podcast episode. I will cover it in a video eventually. rationalreminder.ca/podcast/76

[@classifiedata]

tell us more about long short for higher risk adjusted returns at the efficient frontier, and about options portfolio too

[@siddhartha_1]

I like your style of presenting. Do you write the words first? Are you speaking from memory or reading as you speak?

[@BenFelixCSI]

Thanks! I write the words first and read them as I speak.

[@redoxhydra]

As an investor with a high risk appetite I'm very interested in this

[@GiantAnteatersRkool]

So if you own $100 in sp500 etf and $100 in a 3x leveraged etf, you would expect 2x the volatility if the market right? How much higher is expected volatility if instead you own $50 in sp500, $50 in small value etf, and $100 in 2x leveraged etf?

[@mikes1984]

In the long run do you think you would profit from investing in a total US/world index fund using a 4% LOC?

[@brianbirnbaum9760]

Hey Ben, can you explain more what you mean by the notion that the leverage is priced into leveraged ETFs? I didn’t quite grasp how that is and how it affects returns.

[@BenFelixCSI]

The convenience of the built-in leverage slightly reduces the expected return. Based on this paper docs.lhpedersen.com/EmbeddedLeverage.pdf _Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns_

[@rtashpulatov]

A good way for borrowing against the house to invest in non-registered account is to execute so-called Smith Maneuvre: it works well is you already have some spare cash or non-registered stock. You sell your stocks to pay of as much in your mortgage as you can, then you borrow that equity to buy back the same stock portfolio and now suddenly the interest on that loan is fully tax deductible.

[@hahaboy211]

@12:12, what do you mean by it being priced in? For an index ETF, won't derivatives and the individual holdings simply be used to reflect the underlying index such as S&P500. The S&P500 doesn't price in leveraged ETFs into it?

[@BenFelixCSI]

The convenience of the built-in leverage slightly reduces the expected return. Based on this paper docs.lhpedersen.com/EmbeddedLeverage.pdf _Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns_

[@pradeepdarji5407]

Great contentand explanation as usual Ben, leant lot about investing and personal finance from you video series, following you since I came to Canada almost 4 years back❤️❤️❤️ Small query , we can use credit card(promotional balance transfer offers) 1.5% to 2.0 % per year. Very few exceptional cases, Which less expensive than traditional margin account which charges around prime(2.45%) plus 1.55% equalls to 4.00%.

[@Lasidar]

Great video Ben. Do you have a guideline for what to use for expected equity returns in order to compare against the cost of borrowing to determine if expected return will exceed borrowing costs?

[@BenFelixCSI]

Thanks! Yes, PWL documents expected returns annually here www.pwlcapital.com/wp-content/uploads/2019/03/PWL-WP-Kerzerho-Bortolotti-Great-Expectations-2019.pdf I will also do a video on estimating expected future returns eventually.

[@fitimimami8771]

Ben Felix , is there one for 2020/21 ?

[@domenicomartistocks]

Leveraging can definitely be very dangerous if your investments do not go as planned as you will likely receive margin calls if the stocks you purchase decrease in value. Also, using margin theoretically is like putting a timer on your investments since the longer you hold the investment for, the more money you will be paying in interest and the lower your return on investment will be. I believe the best investments do not require leverage as your time horizon is infinite with stocks and it doesn’t cost you more to hold a stock for 10 years as it does to hold it for 1 single year. This allows the investor a lot more flexibility and is a much safer way to invest ones money without putting a timer on any of their investments

[@mpower2386]

The point of leverage is not always just to boost returns but sometimes it can help lower the risk adjusted for returns. Let say you invest 100% in spy, you are not leveraged but are pretty much all in on market risk. Now let say you take 50% of your money and put it in a 2x s&p 500 leveraged etf, you have more or less the same market exposure but have 50% of your money left to play with. Put that 50% in any asset with a positive return expectency that is not correlated with spy (like gov bonds) and you will have a lower risk adjusted for returns then if you would just put 100% of your cash in a s&p 500 etf. The only question that remains is if this gain in risk adjusted return is enough to offset the added cost of using leveraged product... If you know what you are doing, I think it can be

[@domenicomartistocks]

M Power okay that does make a lot of sense in terms of helping your diversification but I still believe that the added cost of using leverage isn’t worth it were something such as a recession to happen right after you invested as it could take up to even a few years for the market to recover. I do understand what you’re saying but I just believe that one should invest the money they have and that they are ready to lose should a catastrophic event occur and by using leverage you are adding risk to this strategy. But thank you for the clarification👍🏻

[@mpower2386]

@@domenicomartistocks in the case I laid out, if a recession hit, you would be better off being invested 150% (100% equity /50% short term bills) then only 100% in equity unless the negative correlation between bonds and stocks were to break. So to your point yes, if you want to make more money there is always some risk creeping in somewhere, you just need to be wise enough to know those risks exist and to figure out which one you can handle. I heard some financial planner say that for most of his younger clients a 60% bonds 40% equity is optimal not because thats what the numbers dictate but because it is, on average, the level of volatility his clients can assume long term without making terrible decisions along the way... so your advice would be correct for most people.

[@DiamondTear]

The longer you hold the investment for, the more you'll get in dividends and appreciation. I don't see where the time limit would come from.

[@domenicomartistocks]

diamine665 because with leverage, the longer you hold the stock, the more interest you are paying so you essentially are hoping you can get rid of the investment as soon as possible

[@opufy]

Canada represent!

[@gabesauce9]

This is great. Can we get more on things like this?

[@BenFelixCSI]

Any specific suggestions?

[@erichandersen3343]

@@BenFelixCSI More info on using ETF and index options as a form of leverage (as discussed by Ayres & Nalebuff, but with more practical detail) would be greatly appreciated! Love your work, I've kept an eye out for info on leveraged investing for years and this is possibly the most rational and approachable analysis I've seen.

[@stakis12]

Can we expect further discussion on this topic on a future episode of Rational Reminder? I’d love to hear about portfolio structure with your model portfolios asset mix etc when introducing a HELOC to the mix.

[@BenFelixCSI]

Yes, it is on the menu for our second episode of 2020. I think we will discuss leverage for both the portfolio topic and the planning topic. There are good angles to discuss leverage in both contexts.

[@stakis12]

Ben Felix you guys are legend!!

[@Dave-yw2wc]

Great video. I've been using leverage at a 2% interest rate. My leverage is 32% of my portfolio giving it room to survive a 55% drop in the stock market. I'm 33 but got started investing late in life so hoping I can use leverage as safely as possible to help catch up. Fortunately I started investing in April after the COVID selloff so as long as the market can hold it's gains I got off to a good start being up 46% in 8 months. I predominantly invested in Dividend stocks such as STOR, JPM, BAC, AT&T, Northrup Grumman and so on.

[@geotech8071]

Hi Dave, did you use your dividend stocks to re-balance the leveraged ETF?

[@robinspanier7017]

why would you invest in single stocks with leverage, thats a sure way to lose

[@PORTDEPAIX]

I look at the charts of QLD and QQQ, and I found QLD has returned 2028% compared to 531% by QQQ for investors in the last 10 years. QLD has made a lot of its long term shareholders filthy rich.

[@xingchenwang1584]

Introducing margin stocks: what's the quickest way to go brankrupt during a financial turmoil?

[@awsalmufleh6880]

So can we ever use leverage for longterm set it and forget it approach? Or do we have to be actively day-trading to make it work?

[@ioannislazaridis4887]

Thank you and congratulations for your precious free lectures. After watching this video I have decided to borrow from my brokerage firm so to buy more stocks. Interest in Scandinavia is around 1% . Greetings from Finland.

[@BenFelixCSI]

Nice! Actionable information is what I am aiming to provide. I'm glad this video was useful to you.