Leveraged ETF Problems

[@matthewmelange]

4:49 Wouldn't it be better to compare it to SPXL the Dirextion 3x vs S&P 500? Otherwise I don't get what you're trying to show here, it's like saying shorts of Apple stock have not performed as well as regular Apple stock from 2010 - 2019.

[@IncomeBoost42]

Matthew Melange exactly, if the s&p 500 has a overall fairly consistent appreciation, then any negatively leveraged S&P 500 fund would likely lose for 2 reasons: 1. Daily Volatility isn’t that extreme (usually or at least in the long run) and 2. The general trend has been appreciation Would be good to see the 3x values, although my biggest concern is the management fees which eats a big chunk of gains.

[@Rich72James]

Yes bear leveraged ETFs always do worse. Better to compare with bull leveraged etf

[@abhishes]

You cleverly chose the Bear 3x rather than the Bull 3x. Just to add fuel to your confirmation bias.

[@theowenssailingdiary5239]

Exactly

[@RomanTheUTubeWatcher]

Excellent content, but totally confused me by suddenly introducing the Inverse x3. Would be awesome if the post could be edited to maintain consistency along the +3X topic and cover the bears in another video.

[@paragapte2005]

Does not make much sense. Please look at the returns created by TQQQ or TECL or QLD or BIB or SSO. In the long term , market tends to go up. More wins than losses is the long term tendency in which Leveraged ETF will always make better returns. Key point is Leveraged ETF will be much more volatile depending upon leverage. Example of 10% decline and increase does not make much sense. This logic is even applicable for price of a single stock.

[@theowenssailingdiary5239]

Exactly... On the way up TQQQ gets so far in front its scary... The charts don't lie.. Its just wether we can hold on for the ride..

[@LondonReps]

Another great video. I'm 20 and don't have any investments yet but thoroughly enjoy your videos and hope they will prepare me well for my financial future, thank you.

[@Pensioncraft]

Hi LJSE thank you! It's great that you're starting early, over the long term compounding will make your current investments grow massively! Thanks, Ramin.

[@burrellinvestments5952]

Please do not be afraid of leverage. It can be a good thing.

[@bmwofboganville456]

There is a big thread on leveraged ETFs on the Bogleheads forum, pairing off 3xS&P 500 with 3x US long-term bonds. Some people rebalance once a quarter, others use vol targeting monthly to vary the equity exposure. A simple 50-50 split of UPRO (3xS&P500) & TMF (3xbonds) has had a 28% cagr since Jan 2010 with a standard deviation of 20%.

[@Cheezy-gp7jt]

Can you link to the thread?

[@bmwofboganville456]

@@Cheezy-gp7jt 'Hedgefundie' thread

[@Pensioncraft]

Hi Forestman, thanks for that it sounds really interesting. Ramin.

[@AK-ky3ou]

Yup that thread is awesome. Kinda wish it wasn’t started, has me seriously contemplating a leveraged portfolio. hedgefundie is the creator if anyone is interested in searching it up.

[@jamesclark7461]

I have backtested a risk parity model of UPRO/TMF using linear regression of VFINX/VUSTX to generate synthetic data for the leveraged products to get back to 1986. Excellent model! However, the whole strategy is predicated upon the predominately negative correlation between US equities and US Treasuries. If the correlation significantly changes then this strategy goes to hell quite quickly. Also it must be kept in mind that Treasuries have been in a 30+ year bull market which is another factor that has contributed to the out sized returns of the strategy.

[@juniortj9428]

I strongly disagree. I bought 5k worth of TQQQ March 24 2020 and I can tell you, coffee taste different when I check my holding. I'm not selling anytime soon. One thing I learned is, when it dips, load the boat.

[@Tatusiek_1]

wish i bought into TQQQ in march 2020, i’m still new to it, so i hope it will greatly benefit me for years to come

[@simplydividends]

How's it doing now?

[@juniortj9428]

@@simplydividends I sold at $175 and bought Canadian Blue chip dividend companies.

[@simplydividends]

@@juniortj9428 tqqq peaked around 86$?

[@simplydividends]

@@juniortj9428 also, are you looking to re enter at some point as its down about 70%?

[@thedude5599]

On March 6/ 2009 the SPXL 3X bull was 1.35 USD per share today the SPXL is 65 USD per share an increase of 4800% The SPY on MArch 6/2009 costed 68.92 USD . Today PSY is 321.73 So an increase of 450% I will take my 4800% increase over the 450% increase any decade TY. Not sure what chart you are reading but just look at SPXL chart sand SPY charts. You are wrong

[@erichvonmolder9310]

Has anyone ever seen the market go up 10% one day and the next, down 10%? I would like to see real-life examples, not fantasy examples. Leveraged ETFs are great investment vehicles, but you just have to deal with the Down days and if you can't, get yourselves a Vanguard ETF.

[@Pensioncraft]

Hi Erich that was an example to show the effect of high volatility. I compare actual risk and return for Boost ETFs vs a diversified portfolio at 8:14 Thanks, Ramin.

[@burrellinvestments5952]

First of all, even though the expense ratio is "high" relative to what it derives from it is actually cheap! If you use a margin account you'd pay a lot more in interest than you would with these funds. These funds are very cheap when it comes to leveraging a position with better capital efficiency. Second, like you said they're cash secured so yes they can be used in some IRA accounts. Third, the main reason you'd use one of these funds is not to go all in. You'd use this to get the same exposure to the underlying with less capital and thus freeing up buying power to use in other investment vehicles/underlings. Fourth, use can use these funds for long term investment strategy, however, you have to be active and manage the account. You can't be passive using these funds. Fifth, these can help investors to hedge their positions to reduce risk as well. I do understand these arguments you have made but it is only half of the conversation. Futures offer leverage but for big account sizes. These allow smaller investors to use leverage. Thanks for the video but please consider more of the benefits that these investment vehicles give. Thanks!

[@Pensioncraft]

Hi Burrell Investments thanks for your comment, those are all interesting points which you make. This was intended to show the dangers of leverage, but as you say for more experienced investors leveraged ETFs could be useful. However, for most investors I think they present more risks than benefits, particularly those who are new to investment and drawn in with the promise of quick profit. Thanks, Ramin.

[@burrellinvestments5952]

@@Pensioncraft I agree with that, I just don't want people scared of these products but like you say you can't be greedy and think they are a quick fix!

[@dee23gaming]

Yep, leveraged ETFs are meant for trading. I'm more of a trader than an investor, but I'm open to doing both.

[@khary30]

You saved me making a costly mistake. Thanks :)

[@sirst1332]

Just a question to the -/+ 10% calculation on 1:45: isn't that basically saying the index dropped 1% totally over the 2 days?! In that case leverage is bad obviously. But if I'm going to invest in ETFs I'm kind of betting that the index is rising over a a period of time (in total) so in that case leverage would be a thing. There might be other costs involved since nobody gives you leverage for free but just for the understanding. Or am I getting it wrong?

[@karliechen4738]

Sir St this daily volatility of 10% assumption is not factual. Statistically, the more daily volatility the more the tracking errors. That’s naysayers biggest argument against leveraged etf. But in reality, the daily volatility is usually less than 1% per year, therefore this example is not appropriate. That being said, leveraged etf is high risk high return investment. It may not be suitable for most people. But if you know what you are doing, and put a small%, 5 to 20 depending on your experience and risk level. You should be able to double that portion of your money every 5 years, which is half of the time spy needs. For less experienced investor, just wait for a major bear market, be patient, when market drops more than 25%; ideally more than 30%; then buy the leveraged etf. Good luck!

[@akal1236]

The things is with leveraged ETF’s that they compound every day. So after day one you’re in a 20% loss and then when day two rolls around the 20% gain will still have you total less than the 10% gain. Then use this example for say 3-5 years where you just hold. There will be plenty of times where you’ll end the day on a loss and the next day the win won’t make up for the loss. So whenever the market is going sideways you can guarantee that you lose money. Here’s 10+ more risks of investing in 2x ETF’s from SSO: www.proshares.com/media/prospectus/sso_summary_prospectus.pdf?param=1514896580207

[@theowenssailingdiary5239]

Ohh please.. Go look at a chart, then come back and tell me how all you've said also works when markets rise. Its just compounding my man-it is the same for any stock, be it VOO or TQQQ- nothing unique about leveraged etfs, other than the volatility... Same goes for something like NVIDIA... People explain this like they've discovered some new maths, or that this only applies to leveraged etfs.. In a long bull run tqqq will give you way over 3x for the same reasons you are doom and glooming it. Its risky as hell, but let's not be that guy that quotes from the prospectus ehh? Just don't.. As for sideways markets, sure, but show me on a chart where TQQQ got chopped up, and then failed to recover. @@akal1236

[@liberalstudiesmaterials899]

May I ask should one buy SDOW now please?

[@chris319]

At about 7:35 you say the FTSE 100 returned 1.6% while the 2x fund returned 7% and the 3x fund returned 8.2%. You just defeated your own argument. Then you try to backpedal by talking about risk, but a the end of the day you have more money with either leveraged fund than with the underlying index. Volatility, or what you call "risk", cuts both ways - to the upside as well as the downside.

[@tagapiouplayz3737]

You also have to weigh in decay too. If you are aiming to buy into something for the long term, you need to make sure It can beat the decay of the etf.

[@bobhoskins9595]

1: Don't talk in pounds/dollars. Just percentages. That is universal. 2: Your examples are absurd. How often does the S&P move 10% in a day? You know it halts after 7%? That has a very positive affect on the way people panic. How about realistic moves and realistic time tables. You use a multi-year example to show the decay. NOBODY invests in these funds for more than a few weeks if they have any brains at all and even that is too long. Really a few days is enough to show decay. Your numbers a 2:40 are meaningless for many people. Better to show it on a chart showing real world examples in reference to the tracked index.

[@anwaranfield1324]

You ever thought about making a video?

[@rossmacintosh5652]

Thanks Ramin. Your video showed up today in my recommended videos and I'm glad I clicked, watched, and then subscribed. In the past I've invested in leveraged ETFs, holding them for several months at a time, and I did well. I stopped when the US bull market in 2017 started being more volatile. When I invested in them I likely watched every youtube video that discussed them. Almost every video was garbage in that the content providers did a poor job of describing them and the risks/benefits. They were regurgitating the same information every time without really understanding the product. Your video is a breath of fresh air! You did the best job I've seen of explaining them and it makes me want to watch more of your channel's videos. If you are inclined to do a follow up video on leveraged ETFs I'd suggest showing the results an investor would have had in various past market periods. I think you'll show that when markets (bull or bear) do not have high volatility, that leveraged ETFs can do very well. You can also potentially show more impactfully what negative effects real-world volutility can have on returns.

[@Pensioncraft]

Hi Ross, thanks for your feedback, I appreciate it. That's a good idea, as later (thanks to the comments on the video) I saw that a Boglehead was running a leveraged bond, leveraged ETF portfolio. I think the long-term comparison would be interesting. Thanks, Ramin.

[@angeloc1922]

Thank you so much for all your great work! I wish you to achieve more and more in terms of popularity, success and gratitude from thousands and thousands of us! I pray for you to continue doing more and more of this and whatever else you aim to do, good for you and good for others. Wish you the best things 🙏🤞

[@Pensioncraft]

Thank you so much angelo c! I wish you the very best things too. Ramin

[@angeloc1922]

@@Pensioncraft Thank you Ramin! I will continue following you and learning from you :)

[@MegaPrck]

Am I wrong to in thinking that the leveraged reverse etf disproved his point?

[@Mshukrimahadi]

can we lose money (wiped out) because of the leverage used?

[@Pensioncraft]

Hi Shukri, yes leverage can quickly wipe you out i.e. very large drawdowns. Thanks, Ramin.

[@flurinjenal374]

In case the leveraged ETF crashes to zero, do you have to pay extra for dept or did you "just" lose all your money? What is the mechanism there?

[@johanneszwilling]

Best explanation after trying a couple of other videos!

[@Pensioncraft]

Glad it helped!

[@theowenssailingdiary5239]

No, its a terrible explanation that failed to mention the positive traits-people are holding TQQQ long term. The compounding works in your favour on the way up. Go and check out a chart of TQQQ- it does better than 3x on the way up-and in a downturn it actually falls less than 3x.. Read other comments from people who hold this long term. NOobody is using inverse bloody etfs. He set this up to fail..

[@karliechen4738]

The daily volatility average is not 10%+, not even 1%. Agreed not to buy any inverted ETFs, leveraged or not. But check out the last 10 years chart of spxl. The result is fantastic. When the time is right, wait for a bear market, it may work its magic for long term investors again.

[@karliechen4738]

Also, FTSE has underperformed spy since 2008. Your global lifestyle fund of course will do better than FTSE, even with the leveraged. My guess you are focusing on UK investors. Spy and spxl did way better the FTSE, therefore your global lifestyle fund outperformed FTSE.

[@marktalksmoney1956]

We don't need that much leverage, it just adds extra volatility

[@Pensioncraft]

Hi Cliff I agree leverage is not for most investors. Thanks, Ramin.

[@burrellinvestments5952]

I don't think it is to much leverage. Using these products correctly can actually reduce volatility.

[@dee23gaming]

It's not a bet if you understand price action analysis. I can see these support zones hold nicely... A LOT more nicely compared to forex.

[@TKKSuper]

When do you have to pay out the expense ratio? If the expense ratio is 1%, is tat deduct 1% from your total annual capital gain? thank you

[@Pensioncraft]

Hi Timothy it's usually subtracted from your daily returns i.e. if it's 1% then if there are 250 trading days in a year then 1/250th of 1% would be subtracted from your ETF return each day. Thanks, Ramin.

[@TKKSuper]

@@Pensioncraft thank you =D!

[@mogtrader8]

What about SPYders? Those are 1x, do those decay?

[@Atombombmother]

If you held spxl, a 3x lev fund tracking the s&p, since jan 10, 2009, you would have increased your money 23 times. Trying to time the inverse is ridiculously risky. I suggest never doing this. But the 3x bull is easy money.

[@Pensioncraft]

Hi Atombombmother the period you're talking about is a blistering equity market rally, so of course 3x leverage performed well during that period. However, if markets move sideways (no strong rally) with volatility 3x leverage will lose money for the reasons I show in the video. If markets fall leverage will amplify that loss. So I'd disagree that 3x bull is easy money, it's very risky indeed. Thanks, Ramin.

[@Atombombmother]

@@Pensioncraft That's true but stocks tend to go up more often than down, especially over long periods. Since 1900 only 3 decades have had negative returns. Since 1940, only once (2000s) has it happened.

[@prostock-zac3921]

@@Atombombmother I am in agreement with you. I keep seeing all these videos and articles warning about the risks of 3x bulls, but have they actually checked the gains of TQQQ, SPXL, UDOW and TECL over the past 5-10 years? Literally everyone is saying its only good for intraday trading, or a few days at max. Don't understand why everyone is so bearish on the 3x bulls.

[@ridzuanali1919]

Thank you.

[@Pensioncraft]

You're welcome!

[@mark.k7206]

Well explained, thanks once again.....

[@Pensioncraft]

Hi Concerned Voter, my pleasure, I'm glad you found the explanation helpful. Thanks, Ramin.

[@robertthomas3461]

At the risk of confirmation bias, this video affirms my gut instinct against this type of product

[@Pensioncraft]

Hi Robert, I think leverage isn't suitable for most investors and that's why regulators try to steer investors away from it. For example, there's a cap on leverage for UCITS ETFs and a focus on not being able to lose more than you invest i.e. you can only lose 100% of your investment, not more than 100% which is possible if you borrow money to invest. Thanks, Ramin.

[@burrellinvestments5952]

@@Pensioncraft I think leverage is right for all investors if they are taught how to use it to improve capital efficiency and reduce risk.

[@joanneharshaw168]

Hi Ramin, I already have a life strategy 80% fund, do you think diversifying with extra ETFs is too much? Thanks

[@Pensioncraft]

Hi Joanne, I try to keep things as simple as possible. If you want to try other funds there's no harm in it, all it does is tilt your allocation. For example, if you buy an emerging market fund that will just boost your overall exposure to emerging markets. What I'd suggest is that you keep those other fund allocations small until you feel more confident that you understand how they've affected your portfolio risk and returns. Thanks, Ramin.

[@burrellinvestments5952]

Just my opinion, if you look to diversify to mitigate risk, look for investments that are uncorrelated or have little correlation to your current investment.

[@jbullionaire2749]

Well explained as usual.

[@Pensioncraft]

Hi J BULLIONAIRE, thanks, Ramin.

[@tjo1247]

Thanks a lot for all your videos, very informative and it has helped me a lot. I was completely ignorant about difference between ETF and leveraged ETF. Currently I am holding ~1000 shares of ERX since Mar 2020 and see gain of 50% in my brokerage account. I am optimistic about energy doing good in next 2 years. But after reading whole lot of scary stuff about drawbacks about leveraged ETFs, i am not sure if holding ERX ETF is risk and its corresponding implications. Please advise.

[@tagapiouplayz3737]

If you are bullish on it, then there’s not a reason why you shouldn’t do it. I’m bullish on Tesla, so I hold x3 leveraged etf specific to Tesla. However, you do want to look at the costs too daily of the etf you choose. Mine is only 0.0082%, which is 3% a year, whereas the one demonstrated in the video is 1% daily, and if you bought the one demonstrated in the video over the long term you’d see big losses. My point is, please please please heavily research if you will use this method

[@muxi0121]

Did anyone really think betting against the s&p was a good idea long term?

[@Pensioncraft]

Hi Tony K I hope not. There aren't many trends stronger than the rise in value of the S&P 500 long-term, so betting against it is an (almost) sure way to lose money! Thanks, Ramin.

[@ryanp987]

Check the past returns for tqqq...high-risk, high-reward

[@Tatusiek_1]

@@ryanp987 and tecl is a good one, it slightly outperforms TQQQ

[@InvestingEducation]

nice video!

[@Pensioncraft]

Thanks Investing Education. Ramin.

[@mattlm64]

The FTSE 100 is no good in the first place. 2x or even 3x daily leverage has *historically* worked for US markets.

[@saitomsai4150]

Markets react in Bull/bear cycles. Bear Boost ETF is best used in a period of economic downturn with 3months to a period of 1year Max. Long boost ETF is better used in long term bull cycles S&P500 during the last 10years. The difficulty is to time the market as always. In terms of Risk/Return profile: High risk High reward.

[@axeyd6347]

Why are the UK ETFs so bad? Some of them are just sat on a line and then every so often jump a ludicrous amount on a single bar and then back down again. It's untradeable. Anyone?

[@AK-ky3ou]

Gawd damn, you the man.

[@Pensioncraft]

Hi A K thanks. Ramin.

[@Cheezy-gp7jt]

If leveraged ETF's are, in fact, doomed in such a predictable way to beta-slippage, than why isn't shorting such funds a sensible long-term strategy(assuming the costs of shorting are not higher than risk/reward of doing so)? Also, would focusing on a better distribution of positive and negative returns (high positive bias) on a daily basis over be a better buying strategy leveraged ETF's rather than overall returns over some longer term period?

[@bmwofboganville456]

The slippage is overstated. Look at the returns of UPRO vs SPY. Leveraged ETFs can be held for the long term, in a barbell approach.

[@Pensioncraft]

Hi Cheezy 2000 my point isn't that leveraged ETF returns are doomed, just that they are unpredictable. For example, if you short a 3x short leveraged ETF you could easily get wiped out by a few consecutive months of up-crashes. Bridgewater sort of do what you suggest in your second point when they lever up Treasury returns in their risk parity funds. I suspect that behaves better given the popularity of Bridgewater's products. Thanks, Ramin.

[@theowenssailingdiary5239]

Well, good content, but you set that up to fail. Why cover inverse etfs?. Im a tqqq holder long term. I keep adding. The compounding usually works in your favour- obpver time it returns multiples higher than 3x. (until it crashes, of course). But I keep adding. The problem is when it gets to being a higher proportion of my portfolio.... Hard to add up high!!

[@Frank020]

So it's the daily return. Not a 3x if the Market Value.

[@leonh2140]

What about A0X8ZS ? Of course if you search for a poor performing index and look at the risk-profit profile of a leveraged ETF nothing great comes out. But just look at the S&P500 or MSCI USA and you'll see that the leveraged ETF performed much better than the normal one the past ten years. So why are there still so many concerns?

[@arm.workouts]

I dont agree