Would you mind sharing the Excel spreadsheet with the data and calculations?Rogue_trader wrote: ↑Wed Apr 07, 2021 5:54 pm
Yes, the formula is correct and as you can see there is risk free rate. The same risk free rate should be also emended in UPRO, because UPRO cannot borrow for free, but it seems that it can and not only that they are even borrowing at negative rates. Or there must be some other source of return boost, which makes UPRO to beat 3*S&P500.
Dividends are irrelevant in this case. I am using S&P500 total return index and UPRO is most likely also based on that (if not then it is even less logical why it beats 3*S&P500).
Volatility drag is totally irrelevant here. I am talking about daily returns and their cumulative product not annual returns! Have you tried to compare UPRO and 3*S&P500? You can easily do it in excel. UPRO beats it and it beats it big.
Are 3x leveraged ETFs the long-term winning strategy?
Re: Are 3x leveraged ETFs the long-term winning strategy?
Re: Are 3x leveraged ETFs the long-term winning strategy?
If you can convince me that factor funds produce a higher long-term CAGR than 70/30 UPRO/TMF, I sure will.MotoTrojan wrote: ↑Wed Apr 07, 2021 5:56 pm
Proud of you. Now come to the dark-side and get into deep-factor tilts!
I looked a bit into factor investing (multifactor, small cap value...) but they all produced inferior results than the S&P 500 since inception.
I know that a factor premium can (and does) underperform for quite some time, but the most I have seen that one can expect in additional CAGR long-term is around 2%, from what I have heard.
Also, maybe the factor returns have become weaker post publication?
Re: Are 3x leveraged ETFs the long-term winning strategy?
That's interesting. From what I can tell, the UPRO doesn't pay out any dividends, but the fund still tracks the total return index, right? (or maybe net total return if you subtract taxes)
Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes.
Re: Are 3x leveraged ETFs the long-term winning strategy?
After digging deeper into the simulations myself, I acknowledge that mixing bonds with UPRO does produce a higher CAGR.AnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
This seemed very counterintuitive at first, as bonds are normally used to reduce the CAGR. But I guess leveraged ETFs follow their own "laws" and it pays off to hold some parts of your portfolio in an uncorrelated asset, so you can "buy the dip" when UPRO tanks by 98%.
I think the quarterly rebalancing that Hedgefundie is doing is ideal. The only thing I see that can be changed to improve the long term CAGR is switching to a 70/30 UPRO/TMF allocation.
Re: Are 3x leveraged ETFs the long-term winning strategy?
Risk versus reward. Volatility is not the issue, it's the reward for the extra volatility is not worth it. If you can get 95% the benefit with significantly less volatility it would be silly not to do so. Why? What if economic factors are different the next time the market declines by 50+% and recovery is not what it's been in the past
Re: Are 3x leveraged ETFs the long-term winning strategy?
UPRO pays dividends, but it does not track total return index, just the price index.tradri wrote: ↑Thu Apr 08, 2021 5:14 amThat's interesting. From what I can tell, the UPRO doesn't pay out any dividends, but the fund still tracks the total return index, right? (or maybe net total return if you subtract taxes)
Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes.
https://www.nasdaq.com/market-activity/ ... nd-history
Re: Are 3x leveraged ETFs the long-term winning strategy?
Certainly agree with thisAnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I think it's unproductive to think in "what ifs". Following the strategy that has proven to achieve the highest CAGR long-term seems like a sensible thing to do. (for me)Ramjet wrote: ↑Thu Apr 08, 2021 5:29 am
Risk versus reward. Volatility is not the issue, it's the reward for the extra volatility is not worth it. If you can get 95% the benefit with significantly less volatility it would be silly not to do so. Why? What if economic factors are different the next time the market declines by 50+% and recovery is not what it's been in the past
As far as the added return not being worth it, I think an additional compounded return of ~0.6% anually might be worth it. (And this only assumes yearly rebalancing. Quarterly rebalancing most likely produces better results.
tradri wrote: ↑Wed Apr 07, 2021 1:04 pm
55/45 UPRO/TMF produces a better CAGR, at 13.77%.
Still, I assume the quarterly rebalancing costs aren't negligible.
According to these backtests, the best UPRO/TMF combination is 70/30 UPRO/TMF, producing a CAGR of 14.31%.
P.S. After playing around with that spreadsheet, this Hedgefundie risk parity strategy really does sound enticing. One question though: Why exactly 55/45 UPRO/TMF and not 70/30 UPRO/TMF, when the latter produces a higher CAGR?
Re: Are 3x leveraged ETFs the long-term winning strategy?
Where does it say that UPRO tracks the price index?jarjarM wrote: ↑Thu Apr 08, 2021 5:33 am UPRO pays dividends, but it does not track total return index, just the price index.
https://www.nasdaq.com/market-activity/ ... nd-history
Re: Are 3x leveraged ETFs the long-term winning strategy?
Since you are a fan of using real data, you can test 70/30 UPRO/TMF vs 100% UPRO since inception in Portfolio Visualizer, and you will see that 70/30 UPRO/TMF produced a higher CAGR. (Especially when rebalanced quarterly)
Re: Are 3x leveraged ETFs the long-term winning strategy?
You know yourself better than anyone so answer thistradri wrote: ↑Thu Apr 08, 2021 6:03 amI think it's unproductive to think in "what ifs". Following the strategy that has proven to achieve the highest CAGR long-term seems like a sensible thing to do. (for me)Ramjet wrote: ↑Thu Apr 08, 2021 5:29 am
Risk versus reward. Volatility is not the issue, it's the reward for the extra volatility is not worth it. If you can get 95% the benefit with significantly less volatility it would be silly not to do so. Why? What if economic factors are different the next time the market declines by 50+% and recovery is not what it's been in the past
As far as the added return not being worth it, I think an additional compounded return of ~0.6% anually might be worth it. (And this only assumes yearly rebalancing. Quarterly rebalancing most likely produces better results.
tradri wrote: ↑Wed Apr 07, 2021 1:04 pm
55/45 UPRO/TMF produces a better CAGR, at 13.77%.
Still, I assume the quarterly rebalancing costs aren't negligible.
According to these backtests, the best UPRO/TMF combination is 70/30 UPRO/TMF, producing a CAGR of 14.31%.
P.S. After playing around with that spreadsheet, this Hedgefundie risk parity strategy really does sound enticing. One question though: Why exactly 55/45 UPRO/TMF and not 70/30 UPRO/TMF, when the latter produces a higher CAGR?
What are the chances you capitulate with a 75% drawdown?
Because that's what you could be looking at with 70% or more UPRO
Re: Are 3x leveraged ETFs the long-term winning strategy?
I guess the only way to find out is to try it out...
I don't know how I will feel in that moment, but my rational self tells me to just "ride it out" (and possibly "buy the dip")
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Re: Are 3x leveraged ETFs the long-term winning strategy?
If you think 70/30 UPRO/TMF is a more efficient way to outperform by 2% than best of luck to you.tradri wrote: ↑Thu Apr 08, 2021 5:09 amIf you can convince me that factor funds produce a higher long-term CAGR than 70/30 UPRO/TMF, I sure will.MotoTrojan wrote: ↑Wed Apr 07, 2021 5:56 pm
Proud of you. Now come to the dark-side and get into deep-factor tilts!
I looked a bit into factor investing (multifactor, small cap value...) but they all produced inferior results than the S&P 500 since inception.
I know that a factor premium can (and does) underperform for quite some time, but the most I have seen that one can expect in additional CAGR long-term is around 2%, from what I have heard.
Also, maybe the factor returns have become weaker post publication?
For what it is worth, the godfather of small-value funds DFSVX has outperformed the S&P500 by 1.34% yet still sits at one of the largest valuation spreads in history in favor of SCV. Rolling 10-year returns favors the SCV fund by about 3.5% CAGR.
Re: Are 3x leveraged ETFs the long-term winning strategy?
Well, as long as you know that's a possibility
I have not read this whole thread have you mentioned your age and if you are doing this with your entire savings?
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Re: Are 3x leveraged ETFs the long-term winning strategy?
70/30 may have improved returns with the prior history which had a higher than normal optimal leverage ratio but that means nothing for the future. Also make sure you are comparing starting/ending points with similar yields, otherwise you are seeing a tailwind which wont occur in the future most likely (1980's to today).tradri wrote: ↑Thu Apr 08, 2021 5:29 amAfter digging deeper into the simulations myself, I acknowledge that mixing bonds with UPRO does produce a higher CAGR.AnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
This seemed very counterintuitive at first, as bonds are normally used to reduce the CAGR. But I guess leveraged ETFs follow their own "laws" and it pays off to hold some parts of your portfolio in an uncorrelated asset, so you can "buy the dip" when UPRO tanks by 98%.
I think the quarterly rebalancing that Hedgefundie is doing is ideal. The only thing I see that can be changed to improve the long term CAGR is switching to a 70/30 UPRO/TMF allocation.
Lastly see how this would work in other markets. My gut says it would fail MISERABLY. Factor investing works in other markets, and even other asset types (bonds, commodities). Ask yourself, is the US just an anomaly? Or was it luck?
Re: Are 3x leveraged ETFs the long-term winning strategy?
UPRO pays dividends, but it does not track total return index, just the price index.
https://www.nasdaq.com/market-activity/ ... nd-history
[/quote]
That's not my understanding. In addition to repurchase agreements for cash management, UPRO has three types of assets: E-mini futures which factor expected dividend in the pricing, regular stock holdings (so with dividends) and total return swaps.
All these factor in dividends.
See page 122 of the semi annual report: https://www.proshares.com/media/documen ... 7884584467
Happy to be corrected me if I am wrong.
Better lucky than smart.
Re: Are 3x leveraged ETFs the long-term winning strategy?
Where are you seeing that DFSVX outperformed the S&P 500? When I look at the max chart on Google from 2000 to today, it looks relatively flat compared to the S&P 500.MotoTrojan wrote: ↑Thu Apr 08, 2021 7:46 am
If you think 70/30 UPRO/TMF is a more efficient way to outperform by 2% than best of luck to you.
For what it is worth, the godfather of small-value funds DFSVX has outperformed the S&P500 by 1.34% yet still sits at one of the largest valuation spreads in history in favor of SCV. Rolling 10-year returns favors the SCV fund by about 3.5% CAGR.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I am just starting to enter my working years, so I have an investment timeframe of about 40 years, I assume, until retirement.
Since I don't have any significant savings anyways, I want to get a lot of exposure to the markets. (as suggested by Lifecycle investing)
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Re: Are 3x leveraged ETFs the long-term winning strategy?
DFSVX has a lot of distributions, total return matters.tradri wrote: ↑Thu Apr 08, 2021 8:24 amWhere are you seeing that DFSVX outperformed the S&P 500? When I look at the max chart on Google from 2000 to today, it looks relatively flat compared to the S&P 500.MotoTrojan wrote: ↑Thu Apr 08, 2021 7:46 am
If you think 70/30 UPRO/TMF is a more efficient way to outperform by 2% than best of luck to you.
For what it is worth, the godfather of small-value funds DFSVX has outperformed the S&P500 by 1.34% yet still sits at one of the largest valuation spreads in history in favor of SCV. Rolling 10-year returns favors the SCV fund by about 3.5% CAGR.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
Re: Are 3x leveraged ETFs the long-term winning strategy?
The timeframe 1955 to 2020 includes a lot of different market environments. From the low-interest rates in the 1950s to the high interest rates in the 1980s back to the low interest rates of today.MotoTrojan wrote: ↑Thu Apr 08, 2021 8:07 am
70/30 may have improved returns with the prior history which had a higher than normal optimal leverage ratio but that means nothing for the future. Also make sure you are comparing starting/ending points with similar yields, otherwise you are seeing a tailwind which wont occur in the future most likely (1980's to today).
Lastly see how this would work in other markets. My gut says it would fail MISERABLY. Factor investing works in other markets, and even other asset types (bonds, commodities). Ask yourself, is the US just an anomaly? Or was it luck?
I am not interested in making it work in every single market (Japan, etc), but I am interested to see if it works for stocks in general. Since there isn't a convenient, low-cost way to invest in a global UPRO/TMF portfolio, I view the US market as a proxy for global stock returns. Sometimes US stocks win, sometimes international stocks win. I don't see the US being replaced by any other superpower anytime soon, so I am not worried about such geopolitical issues. (BTW I'm not American, so this isn't home bias )
Last edited by tradri on Thu Apr 08, 2021 9:48 am, edited 1 time in total.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I am still failing to see the 14+% CAGR. (assuming we are still comparing it with the 70/30 UPRO/TMF rebalanced annually)MotoTrojan wrote: ↑Thu Apr 08, 2021 8:35 am
DFSVX has a lot of distributions, total return matters.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
Re: Are 3x leveraged ETFs the long-term winning strategy?
Change the start date to 2009 and it tells a different story. So many of these strategies work for a time and then they don't.MotoTrojan wrote: ↑Thu Apr 08, 2021 8:35 am DFSVX has a lot of distributions, total return matters.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
- RovenSkyfall
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Most people do a small portion ~5% in a tax advantaged account. There is still a real blow-up risk for this strategy. It can be done in a taxable account, but people usually buy the lagging fund when the other is outperforming. If you were risk tolerant enough to do 100% HFEA, you would eventually not have the ability to do that with new contributions. You could rebalance yearly, the CAGR isnt as good as quarterly and you might not want to let 3x leveraged funds go that long without rebalancing. Ideally you would rebalance daily. In a taxable you will ultimately have to determine the benefit/cost of the frequency you choose.tradri wrote: ↑Wed Apr 07, 2021 1:04 pm55/45 UPRO/TMF produces a better CAGR, at 13.77%.RovenSkyfall wrote: ↑Wed Apr 07, 2021 12:47 pm
I will have to look when I get home as it is taking too long to load now. Two quick points are that currently the HFEA is generally run at 55/45 UPRO/TMF and it is quarterly rebalanced (if you want to compare what most people are using).
Still, I assume the quarterly rebalancing costs aren't negligible.
According to these backtests, the best UPRO/TMF combination is 70/30 UPRO/TMF, producing a CAGR of 14.31%.
P.S. After playing around with that spreadsheet, this Hedgefundie risk parity strategy really does sound enticing. One question though: Why exactly 55/45 UPRO/TMF and not 70/30 UPRO/TMF, when the latter produces a higher CAGR?
That thread is packed with a lot of information. The point of TMF isnt the return, it is the safety for when UPRO eventually does drop. You need enough TMF for that to work. Some people do run 70/30, so its not unheard of. Going back to those probability curves, the more you have in UPRO, the closer you get to that 3x SP500 probability function. At 70/30 you are closer to the 2x SP500 probability curve.
Most people dont actually have a CRRA of 0 or 1 though, so most people shouldn't be 100% in HFEA.
I saved my money, but it can't save me | The Chariot
- RovenSkyfall
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Somewhere in the behemoth thread someone did the calculations and still found a benefit in holding HFEA in a taxable account despite the taxes. Less ideal than tax advantaged, but still increased expected return.DMoogle wrote: ↑Wed Apr 07, 2021 2:31 pmYes, very important. I assume that might be what tradri was referring to in terms of rebalancing costs, but that's exactly why the HFEA thread consistently stresses that it's only a strategy for tax-advantaged accounts.
@RovenSkyfall: I owe you a response, but want to read through what you linked first.
I saved my money, but it can't save me | The Chariot
Re: Are 3x leveraged ETFs the long-term winning strategy?
Somewhere in the behemoth thread someone did the calculations and still found a benefit in holding HFEA in a taxable account despite the taxes. Less ideal than tax advantaged, but still increased expected return.
[/quote]
Here we go: viewtopic.php?f=10&t=288192&start=3350
Better lucky than smart.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I don't think it's true that rebalancing as often as possible is superior. Rebalancing UPRO/TMF monthly, instead of quarterly, actually produces lower returns in Portfolio Visualizer.RovenSkyfall wrote: ↑Thu Apr 08, 2021 10:05 am
Most people do a small portion ~5% in a tax advantaged account. There is still a real blow-up risk for this strategy. It can be done in a taxable account, but people usually buy the lagging fund when the other is outperforming. If you were risk tolerant enough to do 100% HFEA, you would eventually not have the ability to do that with new contributions. You could rebalance yearly, the CAGR isnt as good as quarterly and you might not want to let 3x leveraged funds go that long without rebalancing. Ideally you would rebalance daily. In a taxable you will ultimately have to determine the benefit/cost of the frequency you choose.
That thread is packed with a lot of information. The point of TMF isnt the return, it is the safety for when UPRO eventually does drop. You need enough TMF for that to work. Some people do run 70/30, so its not unheard of. Going back to those probability curves, the more you have in UPRO, the closer you get to that 3x SP500 probability function. At 70/30 you are closer to the 2x SP500 probability curve.
Most people dont actually have a CRRA of 0 or 1 though, so most people shouldn't be 100% in HFEA.
I don't know why you are comparing 70/30 UPRO/TMF to 2x S&P 500. The former has a higher CAGR, as well as a higher Sharpe ratio.
Re: Are 3x leveraged ETFs the long-term winning strategy?
It was in the quote from your original quote???tradri wrote: ↑Thu Apr 08, 2021 6:07 amWhere does it say that UPRO tracks the price index?jarjarM wrote: ↑Thu Apr 08, 2021 5:33 am UPRO pays dividends, but it does not track total return index, just the price index.
https://www.nasdaq.com/market-activity/ ... nd-history
We probably need to dig out the proshare prospectus again to confirm this.Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes.
Re: Are 3x leveraged ETFs the long-term winning strategy?
Just because they don't pay out as much dividend yield as the underlying index, doesn't mean that they don't track the Total Return/Net Total Return index through derivatives.jarjarM wrote: ↑Thu Apr 08, 2021 10:38 amIt was in the quote from your original quote???tradri wrote: ↑Thu Apr 08, 2021 6:07 amWhere does it say that UPRO tracks the price index?jarjarM wrote: ↑Thu Apr 08, 2021 5:33 am UPRO pays dividends, but it does not track total return index, just the price index.
https://www.nasdaq.com/market-activity/ ... nd-historyWe probably need to dig out the proshare prospectus again to confirm this.Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes.
Re: Are 3x leveraged ETFs the long-term winning strategy?
You're right, come to think of it. During the original simulation, work was done using total return. One of weird effect of quarter end /month end rebalance gain was thought to have something to do with dividend calculation at end of month. That's why one should not post in the past 2am, no good comes to ittradri wrote: ↑Thu Apr 08, 2021 10:41 amJust because they don't pay out as much dividend yield as the underlying index, doesn't mean that they don't track the Total Return/Net Total Return index through derivatives.jarjarM wrote: ↑Thu Apr 08, 2021 10:38 amIt was in the quote from your original quote???tradri wrote: ↑Thu Apr 08, 2021 6:07 amWhere does it say that UPRO tracks the price index?jarjarM wrote: ↑Thu Apr 08, 2021 5:33 am UPRO pays dividends, but it does not track total return index, just the price index.
https://www.nasdaq.com/market-activity/ ... nd-historyWe probably need to dig out the proshare prospectus again to confirm this.Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I did some fairly exhaustive testing a while back.
It turns out that end of month and end of quarter have historically been especially favorable rebalancing points. These are what PV uses. Using other parts of the quarter gave worse results than monthly.
Daily rebalancing would have been best without trading costs and slippage, but disappoint when these are accounted for.
Whether this behavior persists going forward, who knows.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
I am showing relative performance compared to S&P500. Returns aren't absolute for your strategy, they are relative to the S&P500.tradri wrote: ↑Thu Apr 08, 2021 9:17 amI am still failing to see the 14+% CAGR. (assuming we are still comparing it with the 70/30 UPRO/TMF rebalanced annually)MotoTrojan wrote: ↑Thu Apr 08, 2021 8:35 am
DFSVX has a lot of distributions, total return matters.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
Small-value did well over 14% if you go back to the 1955 window as you have shown, but again, relative returns is all you can expect.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
I would wager that a backtest that includes several market cycles is infinitely more valuable than one that starts at the market bottom before a historic bull, wouldn't you?ljford7 wrote: ↑Thu Apr 08, 2021 9:33 amChange the start date to 2009 and it tells a different story. So many of these strategies work for a time and then they don't.MotoTrojan wrote: ↑Thu Apr 08, 2021 8:35 am DFSVX has a lot of distributions, total return matters.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
Also to be clear, since January of 2009 it underperformed the S&P500 by 1.5%... nothing to complain about.
Last edited by MotoTrojan on Thu Apr 08, 2021 11:12 am, edited 1 time in total.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
If it only works in one market, that suggests it is not a well founded strategy but is just overfitting. I am not talking about one-off situations like Japan. How would the 70% daily-resetting 3x equity exposure had worked in ex-US stocks? Or even total world? I bet you it would be pretty ugly with massive volatility decay.tradri wrote: ↑Thu Apr 08, 2021 9:14 amThe timeframe 1955 to 2020 includes a lot of different market environments. From the low-interest rates in the 1950s to the high interest rates in the 1980s back to the low interest rates of today.MotoTrojan wrote: ↑Thu Apr 08, 2021 8:07 am
70/30 may have improved returns with the prior history which had a higher than normal optimal leverage ratio but that means nothing for the future. Also make sure you are comparing starting/ending points with similar yields, otherwise you are seeing a tailwind which wont occur in the future most likely (1980's to today).
Lastly see how this would work in other markets. My gut says it would fail MISERABLY. Factor investing works in other markets, and even other asset types (bonds, commodities). Ask yourself, is the US just an anomaly? Or was it luck?
I am not interested in making it work in every single market (Japan, etc), but I am interested to see if it works for stocks in general. Since there isn't a convenient, low-cost way to invest in a global UPRO/TMF portfolio, I view the US market as a proxy for global stock returns. Sometimes US stocks win, sometimes international stocks win. I don't see the US being replaced by any other superpower anytime soon, so I am not worried about such geopolitical issues. (BTW I'm not American, so this isn't home bias )
The US market has been an anomaly. You are going into this assuming it is a good basis for the future. A sound process will work in other markets, and this one doesn't pass that test.
If you are in-fact back-testing to 1955 then good, that is a full cycle for interest rates at-least and is representative of what TMF would've seen, but I still think that period of US equity returns is not a good baseline for what to expect in the future.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Hydromods backtest included a sweeping starting point, where-as tradri you are also putting rebalance timing luck into the mix since Portfolio Visualizer is looking at annual calendar rebalances only. I think quarterly is the best mix of trading costs and optimization personally, but as Hydro said, in theory daily is the best.Hydromod wrote: ↑Thu Apr 08, 2021 11:03 amI did some fairly exhaustive testing a while back.
It turns out that end of month and end of quarter have historically been especially favorable rebalancing points. These are what PV uses. Using other parts of the quarter gave worse results than monthly.
Daily rebalancing would have been best without trading costs and slippage, but disappoint when these are accounted for.
Whether this behavior persists going forward, who knows.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
If you make it through the HFEA threads you will see the posts where people describe the ideal rebalancing (in a frictionless world) as daily. You should be weary of PV for backtesting and the confidence you have with the results as they only look at monthly data and so do not provide a backtest that mirrors reality.tradri wrote: ↑Thu Apr 08, 2021 10:32 amI don't think it's true that rebalancing as often as possible is superior. Rebalancing UPRO/TMF monthly, instead of quarterly, actually produces lower returns in Portfolio Visualizer.RovenSkyfall wrote: ↑Thu Apr 08, 2021 10:05 am
Most people do a small portion ~5% in a tax advantaged account. There is still a real blow-up risk for this strategy. It can be done in a taxable account, but people usually buy the lagging fund when the other is outperforming. If you were risk tolerant enough to do 100% HFEA, you would eventually not have the ability to do that with new contributions. You could rebalance yearly, the CAGR isnt as good as quarterly and you might not want to let 3x leveraged funds go that long without rebalancing. Ideally you would rebalance daily. In a taxable you will ultimately have to determine the benefit/cost of the frequency you choose.
That thread is packed with a lot of information. The point of TMF isnt the return, it is the safety for when UPRO eventually does drop. You need enough TMF for that to work. Some people do run 70/30, so its not unheard of. Going back to those probability curves, the more you have in UPRO, the closer you get to that 3x SP500 probability function. At 70/30 you are closer to the 2x SP500 probability curve.
Most people dont actually have a CRRA of 0 or 1 though, so most people shouldn't be 100% in HFEA.
I don't know why you are comparing 70/30 UPRO/TMF to 2x S&P 500. The former has a higher CAGR, as well as a higher Sharpe ratio.
The TMF functions similar to cash in the probability curves I posted earlier, so you exposure to market beta is predominantly due to UPRO. A typical 55/45 HFEA has a leverage of about 1.6 -- somewhere between the unleveraged and the 2xsp500 leverage probability functions. At 70/30 your probability function is going to look more similar to the 2xsp500 probability. If you remember that curve, there is a significant tail risk at 20 years of holding.....
I saved my money, but it can't save me | The Chariot
Re: Are 3x leveraged ETFs the long-term winning strategy?
You and I have come to similar conclusions. Nobody has been able to advance the discussion in any significant way. The core of the ideal leveraged strategy remains the same: leverage total stock market and long-term treasuries in concert. The only improvements I've been able to justify with any amount of certainty (specifically for someone seeking to maximize CAGR) are a mild reduction in TMF allocation and the addition of multifactor small-cap value funds (e.g. AVUV/AVDV). Even then, these improvements are very minor, and as I said, the core remains the same.AnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
Most of your points would likely be resolved by a cohesive writeup summarizing all that's been discussed, but that task is undoubtedly a monumental one.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Also it should be noted, a significant portion of that is due to the rise in valuations.MotoTrojan wrote: ↑Thu Apr 08, 2021 11:06 amI would wager that a backtest that includes several market cycles is infinitely more valuable than one that starts at the market bottom before a historic bull, wouldn't you?ljford7 wrote: ↑Thu Apr 08, 2021 9:33 amChange the start date to 2009 and it tells a different story. So many of these strategies work for a time and then they don't.MotoTrojan wrote: ↑Thu Apr 08, 2021 8:35 am DFSVX has a lot of distributions, total return matters.
Here is since inception: https://www.portfoliovisualizer.com/bac ... ion2_2=100
And since you opened the door and mentioned 2000 to today... here that is showing nearly 4% outperformance since Jan 2000! https://www.portfoliovisualizer.com/bac ... ion2_2=100
Also to be clear, since January of 2009 it underperformed the S&P500 by 1.5%... nothing to complain about.
I saved my money, but it can't save me | The Chariot
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Don't abandon the ability to update your approach should better information arise. It was not discussed for too long and not modeled, but I am hopeful that a SPY 200 day MA will be a good indicator to go between a more aggressive UPRO/TMF allocation and the 55/45 HFEA. It has the potential to improve returns if a rising rate environment and maintain the insurance of TMF at a lower 'cost'.cos wrote: ↑Thu Apr 08, 2021 11:39 amYou and I have come to similar conclusions. Nobody has been able to advance the discussion in any significant way. The core of the ideal leveraged strategy remains the same: leverage total stock market and long-term treasuries in concert. The only improvements I've been able to justify with any amount of certainty (specifically for someone seeking to maximize CAGR) are a mild reduction in TMF allocation and the addition of multifactor small-cap value funds (e.g. AVUV/AVDV). Even then, these improvements are very minor, and as I said, the core remains the same.AnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
Most of your points would likely be resolved by a cohesive writeup summarizing all that's been discussed, but that task is undoubtedly a monumental one.
The goal of all of these conversations should be to optimize.
I saved my money, but it can't save me | The Chariot
Re: Are 3x leveraged ETFs the long-term winning strategy?
That's why after literally thousands of pages of discussions on the 2 thread, most still settle in on UPRO/TMF with some sort of quarterly rebalancing scheme and maybe a bit of TAA rebalance and that's pretty much it. There were another thread on if a summarization of the whole HFEA is needed but most suggest at least reading through the first 100-150 pages so they can be well versed in all the different arguments first. I wonder if someone will finally undertake the momental task of doing one nowcos wrote: ↑Thu Apr 08, 2021 11:39 amYou and I have come to similar conclusions. Nobody has been able to advance the discussion in any significant way. The core of the ideal leveraged strategy remains the same: leverage total stock market and long-term treasuries in concert. The only improvements I've been able to justify with any amount of certainty (specifically for someone seeking to maximize CAGR) are a mild reduction in TMF allocation and the addition of multifactor small-cap value funds (e.g. AVUV/AVDV). Even then, these improvements are very minor, and as I said, the core remains the same.AnilG wrote: ↑Thu Apr 08, 2021 2:53 am After following several LETF discussion threads on Bogleheads for last couple of years, I observed few things.
- Analysis paralysis is real. Most discussion get into the weeds losing sight of the goal.
- No one reads original two threads completely. Over the years, I have noticed same discussion of trying different combinations instead of UPRO/TMF and TQQQ/TMF, “this time is different”, interest rate environment is changing, etc at least three times with no conclusion and/or different result/outcome.
- Still no one has come up with anything better or cohesive or a solid counter argument than what HedgeFundie came up with originally.
Most of your points would likely be resolved by a cohesive writeup summarizing all that's been discussed, but that task is undoubtedly a monumental one.
Re: Are 3x leveraged ETFs the long-term winning strategy?
Of course! I'm very skeptical of the strategy you describe, however. Similar market timing strategies have been attempted over the past few years by several other Bogleheads, and all met with failure when applying their respective strategies out-of-sample. Static allocations seem to have significantly greater utility than similarly allocated market timing strategies.RovenSkyfall wrote: ↑Thu Apr 08, 2021 11:49 am Don't abandon the ability to update your approach should better information arise. It was not discussed for too long and not modeled, but I am hopeful that a SPY 200 day MA will be a good indicator to go between a more aggressive UPRO/TMF allocation and the 55/45 HFEA. It has the potential to improve returns if a rising rate environment and maintain the insurance of TMF at a lower 'cost'.
The goal of all of these conversations should be to optimize.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Are you talking about 200dMA strategies with LETFs or non-levered funds? I am only aware of one post and one paper. Both of those had promising results. No out of sample tests, but then again HFEA didnt have out of sample until HEDGEFUNDIE started doing it and posting statements.cos wrote: ↑Thu Apr 08, 2021 12:00 pmOf course! I'm very skeptical of the strategy you describe, however. Similar market timing strategies have been attempted over the past few years by several other Bogleheads, and all met with failure when applying their respective strategies out-of-sample. Static allocations seem to have significantly greater utility than similarly allocated market timing strategies.RovenSkyfall wrote: ↑Thu Apr 08, 2021 11:49 am Don't abandon the ability to update your approach should better information arise. It was not discussed for too long and not modeled, but I am hopeful that a SPY 200 day MA will be a good indicator to go between a more aggressive UPRO/TMF allocation and the 55/45 HFEA. It has the potential to improve returns if a rising rate environment and maintain the insurance of TMF at a lower 'cost'.
The goal of all of these conversations should be to optimize.
I saved my money, but it can't save me | The Chariot
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Oh, I am stupid. You got me. So apparently UPRO uses total return swaps (which include dividends) and therefor it beats ^GSPC, but doesn't really beat adjusted prices from SPY. Thank you very much.jarjarM wrote: ↑Thu Apr 08, 2021 4:50 am^GSPC is price index only. If your data source is yahoo, there’s 2 column in the historical dataset, close is price index only, adjClose is total return. ^GSPC close matches exactly as adjClose.Rogue_trader wrote: ↑Thu Apr 08, 2021 2:13 amIs ^GSPC really price only? It fits SPY perfectly.Hydromod wrote: ↑Wed Apr 07, 2021 9:53 pm I did the comparison between ^GSPC*3 and UPRO from UPRO onset to last Friday. Cumulative product of daily returns.
UPRO ended up about 1.44 times larger than ^GSPC*3 (CAGR 36.4% versus 33.0%). ^GSPC CAGR = 13.4%.
Then I did SPY*3 over the same period. SPY*3 ended up about 1.42 times larger than UPRO (CAGR 41.3% vs. 36.4%). SPY CAGR = 15.7%.
^GSPC is price only I believe.
Look at this
https://finance.yahoo.com/chart/%5EGSPC ... VrIn19fQ--
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Re: Are 3x leveraged ETFs the long-term winning strategy?
How about I share with you the R code? But actually the mystery was solved. Apparently UPRO uses total return swaps and ^GSPC is indeed only prices index. So I need to compare UPRO with total return S&P500 and I did that it lags.tradri wrote: ↑Thu Apr 08, 2021 5:03 amWould you mind sharing the Excel spreadsheet with the data and calculations?Rogue_trader wrote: ↑Wed Apr 07, 2021 5:54 pm
Yes, the formula is correct and as you can see there is risk free rate. The same risk free rate should be also emended in UPRO, because UPRO cannot borrow for free, but it seems that it can and not only that they are even borrowing at negative rates. Or there must be some other source of return boost, which makes UPRO to beat 3*S&P500.
Dividends are irrelevant in this case. I am using S&P500 total return index and UPRO is most likely also based on that (if not then it is even less logical why it beats 3*S&P500).
Volatility drag is totally irrelevant here. I am talking about daily returns and their cumulative product not annual returns! Have you tried to compare UPRO and 3*S&P500? You can easily do it in excel. UPRO beats it and it beats it big.
Re: Are 3x leveraged ETFs the long-term winning strategy?
I've been holding a small amount of UPRO (3x leveraged S&P500) in a tax-advantaged account for 3.5 years, and it's up about 170%. This forum is pretty against leveraged ETFs, which is fine except that some of the reasoning is using twisted logic.
When I see posters using cherry picked data it makes me believe them less. For example if you bought UPRO on a specific date 1955 it wouldn't recover until some date in 2020, and that's used to justify the leveraged ETF hate. But the same can be said of the S&P500 in a lot of cases; if you bought right before a crash it will take a long time to get your money back.
If you believe that over time the market will go up, then it makes sense to apply those same strategies to leveraged ETFs.
When I see posters using cherry picked data it makes me believe them less. For example if you bought UPRO on a specific date 1955 it wouldn't recover until some date in 2020, and that's used to justify the leveraged ETF hate. But the same can be said of the S&P500 in a lot of cases; if you bought right before a crash it will take a long time to get your money back.
If you believe that over time the market will go up, then it makes sense to apply those same strategies to leveraged ETFs.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Was there a huge crash in 1955? If you think 66 years of data showing equal returns to the raw S&P500 but with 99% drawdowns along the way is cherry-picked then best of luck.b.lock wrote: ↑Thu Apr 08, 2021 4:44 pm I've been holding a small amount of UPRO (3x leveraged S&P500) in a tax-advantaged account for 3.5 years, and it's up about 170%. This forum is pretty against leveraged ETFs, which is fine except that some of the reasoning is using twisted logic.
When I see posters using cherry picked data it makes me believe them less. For example if you bought UPRO on a specific date 1955 it wouldn't recover until some date in 2020, and that's used to justify the leveraged ETF hate. But the same can be said of the S&P500 in a lot of cases; if you bought right before a crash it will take a long time to get your money back.
If you believe that over time the market will go up, then it makes sense to apply those same strategies to leveraged ETFs.
Congrats on your gamble/trade, it has worked out well.
Re: Are 3x leveraged ETFs the long-term winning strategy?
That is demonstrably false: Bogleheads is the only public forum I found, after searching quite a bit, that has such in-depth inquiry on their use in a variety of strategies. For pete's sake, there are two entire threads with hundreds of pages, amongst the most popular on the whole forum. There are quite a few contributors that openly stated they had money invested in LETFs, some even as their core holding (guilty of that myself).
All other places I found ultimately ended up being the same broken record about them being "not intended for overnight holding" and constant name-dropping of "volatility decay" in a way that made me believe the people didn't even know what it meant. On top of that, there would be a couple of pages of knee-jerk responses and the threads would die out.
Really wondering: what is the twisted logic you mention?
How far would we need to go back with the simulated data, for it to no longer be cherry-picking, though? You have different "eras" of the stock market on display, right here at BH.You can see how UPRO and TMF would have fared in times where they didn't even exist, throughout multiple classic crashes (the greatest hits).b.lock wrote: ↑Thu Apr 08, 2021 4:44 pm When I see posters using cherry picked data it makes me believe them less. For example if you bought UPRO on a specific date 1955 it wouldn't recover until some date in 2020, and that's used to justify the leveraged ETF hate. But the same can be said of the S&P500 in a lot of cases; if you bought right before a crash it will take a long time to get your money back.
That's an idea that came up a few times, from memory, and it's not actually true. You can't just consider the success of SPY and say UPRO will succeed in the same way. Just taking the extreme relative volatility flips that idea on its head... two major examples:
- Adding bonds, which would normally lower CAGR in a stock portfolio, here actually improves CAGR.
- Survival through various crashes with 1x = almost assured failure with 3x (through collapse, massive underperformance or abandon by anybody with a pulse).
Re: Are 3x leveraged ETFs the long-term winning strategy?
It was a chore but I managed to get ^GSPC daily data into a spreadsheet going back to December 30, 1927.
I implemented a LETF simulator in the spreadsheet. The leverage sweet spot is 2x. The worst one-day loss was on October 19,1987, losing 40.9%.
3x leverage is great in bullish times but 2x (SSO) is the better all-weather leverage through bull and bear markets.
At 2x leverage, CAGR is "only" 8.3%. $10,000 became $17,003,711.
Past performance is no guarantee of future results.
I implemented a LETF simulator in the spreadsheet. The leverage sweet spot is 2x. The worst one-day loss was on October 19,1987, losing 40.9%.
3x leverage is great in bullish times but 2x (SSO) is the better all-weather leverage through bull and bear markets.
At 2x leverage, CAGR is "only" 8.3%. $10,000 became $17,003,711.
Past performance is no guarantee of future results.
Financial decisions based on emotion often turn out to be bad decisions.
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Re: Are 3x leveraged ETFs the long-term winning strategy?
Guys.. Rebalancing (which includes leverage, rebalancing the short cash) of all types introduces path dependence. This is true of grandpa's 60/40 portfolio also. It's not a big deal unless you are over leveraged and concentrated in highly correlated assets. Either way, you just have to live with it. Based on many of the skeptical arguments I've read, there seems to be some fundamental misunderstanding by some that somehow daily rebalancing is inherently some other beast than leverage through margin/lending. Really, I think there are people who have posted in this topic that think somehow you don't have to rebalance leverage if you're getting it through some means outside of LETFs.
Yes, this is riskier than 60/40, but let's not get hysterical and say this is certain doom or anything. It's the same trade-off as deciding between cash/equities/bonds allocations, higher risk is merely higher risk of higher/lower rewards. Given the available history of investable assets (not just the LETFs, I'm talking in general going back further) has shown a better efficiency of units of risk per unit of reward for a high sharpe ratio and more diversity, leveraged up to a desired volatility/return than an unlevered and concentrated high risk asset (like say 80%+ equities), I think it's more than fair to feel this relatively simple UPRO/TMF idea has a good chance at succeeding to varying degrees and gets a lot of undeserved hate.
Well, that's my $0.02
Yes, this is riskier than 60/40, but let's not get hysterical and say this is certain doom or anything. It's the same trade-off as deciding between cash/equities/bonds allocations, higher risk is merely higher risk of higher/lower rewards. Given the available history of investable assets (not just the LETFs, I'm talking in general going back further) has shown a better efficiency of units of risk per unit of reward for a high sharpe ratio and more diversity, leveraged up to a desired volatility/return than an unlevered and concentrated high risk asset (like say 80%+ equities), I think it's more than fair to feel this relatively simple UPRO/TMF idea has a good chance at succeeding to varying degrees and gets a lot of undeserved hate.
Well, that's my $0.02
Re: Are 3x leveraged ETFs the long-term winning strategy?
So, 2 interrelated points.OohLaLa wrote: ↑Thu Apr 08, 2021 6:19 pmThat is demonstrably false: Bogleheads is the only public forum I found, after searching quite a bit, that has such in-depth inquiry on their use in a variety of strategies. For pete's sake, there are two entire threads with hundreds of pages, amongst the most popular on the whole forum. There are quite a few contributors that openly stated they had money invested in LETFs, some even as their core holding (guilty of that myself).
All other places I found ultimately ended up being the same broken record about them being "not intended for overnight holding" and constant name-dropping of "volatility decay" in a way that made me believe the people didn't even know what it meant. On top of that, there would be a couple of pages of knee-jerk responses and the threads would die out.
Really wondering: what is the twisted logic you mention?
How far would we need to go back with the simulated data, for it to no longer be cherry-picking, though? You have different "eras" of the stock market on display, right here at BH.You can see how UPRO and TMF would have fared in times where they didn't even exist, throughout multiple classic crashes (the greatest hits).b.lock wrote: ↑Thu Apr 08, 2021 4:44 pm When I see posters using cherry picked data it makes me believe them less. For example if you bought UPRO on a specific date 1955 it wouldn't recover until some date in 2020, and that's used to justify the leveraged ETF hate. But the same can be said of the S&P500 in a lot of cases; if you bought right before a crash it will take a long time to get your money back.
You need to understand the point of "not intended for overnight holding". If you hold UPRO for a year you are going to get a different result then if you bought SPY with 3x leverage. The daily rebalancing is going to give you a radically different character.
Which takes us to the second point, the historical data being used in this thread is mostly useless. You are going to have some insight for periods under 3 years. Maybe 10 years if you use fancy mathematics.
The difference between daily rebalancing and fixed leveraged depends on returns, cost of leverage, volatility, and if prices are mean reverting or trend following. The math behind this is well understood. Their are 2 problems here. The first is that the values of these inputs change frequently. Investment Theory is one of those great subject where the more data you throw at the problem the worse the results are. The second is that there are no classic crashes. Each one is unique.
Be skeptical of models in general. Be extra skeptical of the ones that you find free on the internet.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Are 3x leveraged ETFs the long-term winning strategy?
If you're going to go through all that work, why not use the peer-reviewed (well, Boglehead-reviewed, at least) siamond model?chris319 wrote: ↑Thu Apr 08, 2021 6:34 pm It was a chore but I managed to get ^GSPC daily data into a spreadsheet going back to December 30, 1927.
I implemented a LETF simulator in the spreadsheet. The leverage sweet spot is 2x. The worst one-day loss was on October 19,1987, losing 40.9%.
3x leverage is great in bullish times but 2x (SSO) is the better all-weather leverage through bull and bear markets.
At 2x leverage, CAGR is "only" 8.3%. $10,000 became $17,003,711.
Past performance is no guarantee of future results.