Leveraged ETFs For The Long Term

29 Jun Leveraged ETFs For The Long Term

Over the past year or so, I have been enthralled with the prospect of deploying leveraged ETFs as part of one’s long-term strategy, and so my research has led me to the work of others here on Seeking Alpha who have written extensively on holding leveraged etfs (or as Jack Bogle terms them ‘the lunatic fringe’) for more than a single day.  By the bye, Vanguard has just banned them, so it makes one feel a little rebellious, a little ‘mad, bad and dangerous to know,’ even entertaining the topic.

Dane van Domelen, Logan Kane, Greg Hudson, and Jonathan Cooper are just a few names to search, if one is also interested in the subject.  Many of the articles display some sort of back-testing that show the power of using either rebalancing or market-timing techniques to trounce the S & P 500 index.  So, instead of writing another essay arguing for their use or showcasing a back-test that manifests a 26% return, I have decided to create specific funds with Motif that will allow myself and others here on Seeking Alpha to track them for the long-term, or even invest alongside me.  Essentially, in say 15 or 20 years, one cay say that these funds were ‘Maneos’ Folly’ or ‘Maneos’ Genius.’  Only time and CAGR will determine the proper designation.

FUND #1 – BALANCED ALPHA 3X LEVERAGE –

This fund is my personal favorite, and the #1 choice if one were only going to utilize one fund in the space.  It is comprised of 50% TMF, and 50% leveraged ETFs (20% TQQQ, 10% UDOW, 10% URTY, and 10% UPRO).  One could simply do 50% TMF/50% TQQQ for probably the most outsized gains or even 50%TMF/50% UPRO, but I have added in the major indexes for a bit of diversification.  I would rebalance at least 4x a year, but one could also do 6x.   From March 2010 to December 2018, its CAGR (Compound Annual Growth Rate) when rebalanced quarterly was 27.8%, with a Sortino Ratio of 2.29, and only a .42 US market correlation.

Now, I know that many of you will say that we have been in a bull market and so on and so forth, yet Greg Hudson traced a 50% UPRO/50% TMF over the past 30 years and it returned 27.6%.  Just to put this in perspective – if one can compound capital at this rate over the long term, it places one in the realm of Warren Buffett, Carl Icahn, Peter Lynch, David Tepper and others who have compounded capital in that 20 to 30% range.  It is akin to a dead-eye three point shooter, shooting 41% or a baseball player with a career batting average of between 330% to 366% (Ty Cobb).  $100,000 compound at 27.6% over 30 years is $149,802,903.69.  This is how great investors become Billionaires, as they are compounding capital in that 20 to 30% range whereas the average man is compounding at say between 7 to 11% if they buy a generic, vanilla index fund.  And to this point: 100,000 compounded for 30 years at 10% is $1,744,940.23.  Certainly not bad, but not 149 million either.

FUND #2 – SUPER ALPHA 3X LEVERAGE – 4 INDEXES –

This is a fund comprised of the 4 major indexes: The S&P 500 (UPRO), The Dow(UDOW), The Russell (URTY), and The Nasdaq (TQQQ).  It is equal weighted 25% for each ETF.  From March of 2010 to December 2018 the CAGR (Compound Annual Growth Rate) of the fund when rebalanced quarterly was 26.94% with a Sortino Ratio of 1.32 and a US Market Correlation of .99.  If you didn’t bother to rebalance quarterly, and just let it ride, your CAGR actually rose to 27.60%.  This fund will obviously have massive, soul-crushing draw-downs, but would you trade this for a long-term return 15%+?  This is up to your risk threshold, temperament, net worth, and other personal considerations, but one should not forget the sagacious maxim of Warren Buffett when he said: ‘I would rather have a lumpy 15% return on capital than a smooth 12%.’

FUND #3 – SUPER ALPHA 3X LEVERAGE

This differs from the above fund in that it is a panoply of leveraged funds – 17 to be exact – instead of just the 4 major indexes.  The advantage of this is that one can tweak the sector allocations a bit on the rebalances.  For example, if one thinks that tech stocks and healthcare are going to outperform, while Financials will underperform one could tilt in favor of TQQQ and CURE, while reducing FINU.

One of the advantages of using MOTIF over TD Ameritrade, ETrade, Interactive Brokers for these strategies is their 9.95 flat rebalance fee as opposed to having to sell and buy 17 different funds.  One simply scrolls to the percentage allocation that one desires in MOTIF, and the rest is done for you.  Easy peasy.

FUND #4 – ALL WEATHER ALPHA 3X LEVERAGE –

This was a lot of fund to create as it is a ‘play’ on the far-famed Ray Dalio/Tony Robbins All Weather Fund.  The traditional ETF version would look something like this:

30% Vanguard Total Stock Market ETF (VTI)

40% iShares 20+ Year Treasury ETF (TLT)

15% iShares 7-10 Year Treasury ETF (IEF)

7.50% SPDR Gold Shares ETF (GLD)

7.50% PowerShares DB Commodity Index Tracking Fund (DBC)

What I did is to amend it just slightly and add leverage, so as to amplify the returns.  Here is my version:

40% Stocks (20% TQQQ, 5% UDOW, 5% URTY, 10% UPRO)

35% 20+ year Treasury ETF 3x (TMF)

10% 7 to 10 year Treasury ETF 3x (TYD)

5% Gold 3x (UGLD)

5% Commodities 2x (DYY)

5% Real Estate 3x (DRN)  (Not in the original All Weather Fund, but added in by me)

It will be fascinating to back-test these two competing portfolios in say 2028 or 2038.  Again, only time and CAGR will determine the superior one.  I believe that Robbins and Dalio advise rebalancing 1x a year on the original, so I would do the same on this for continuity.

FUND #5 – BALANCED CHINA ALPHA 3X LEVERAGE

75% YINN (3x China Fund)

25% DSUM (China Bond Fund)

I am a major China Bull for the long term, and I have used this little trade-war brouhaha to buy massive shares of Chinese Banking stocks as well as just generic Chinese index funds.  I am buying China in 2018/2019 for what it will be in 2039.  This particular fund is the Chinese cousin of the 50% UPRO/50 TMF American fund.  I would recommend rebalancing this 4x a year just like the Balanced Alpha 3x leverage.

Now, instead of patting myself on the back and saying that these formulas are infallible, I try to think what could go wrong.  Well, a sustained bear market with 70%+ draw-downs could test the mettle of any ‘long-term’ investor where they would sell the motif at the bottom, as they couldn’t take the pain any longer.  For me, these are designed as 20, 30, 40 year holds, not to be traded in and out of.  Boy, I sound a lot like Jack Bogle with his vaunted buy-and-hold index funds and ‘stay the course’ ethos.

Another threat to these would be the ascent of radical Socialism where derivatives are subsequently banned or highly regulated.  10 years ago this would seem to be rather unlikely, but with the Democratic Party shifting from centrists like Barack Obama, Joe Biden and Hillary Clinton to radicals like Maxine Waters, Alexandria Ocasio-Cortez, Elizabeth Warren, Bernie Sanders, etc, this is not out of the realm of possibility.  What if we have another 1929/2008 with 15% unemployment?  Would financial regulators blame leverage and free-markets, or more pointedly ‘leverage in free markets?’  It is not a crazy scenario to imagine.  But absent liquidation via government mandate, I do think that these will benefit one nicely.  I wouldn’t put more than say 5 to 10% of your net worth in these, but this is of course up to you and your investing temperament.

I will post updates on the funds every so often, so that the readers of Seeking Alpha can see how they are faring.  And speaking of results, MOTIF actually shows the comparisons between the individual MOTIF and the S&P 500 index, so we can see in real-time how they compare.

Best wishes to everyone in their investing endeavors!