Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

skierincolorado wrote: Thu Sep 16, 2021 4:29 pm
DMoogle wrote: Thu Sep 16, 2021 4:19 pm Practically speaking, I wonder if the cost of leverage weighs largely in favor of ITTs. Sure, the implied financing rate of STT should be lower, but given you need more than 2x as much STT compared to ITT to get the same return, the levered Sharpe may end up being lower when that's put into consideration.
I don't think leverage affects sharpe ratios because sharpe ratios are calculated as return over the risk free rate. It might a little bit in PV because of the monthly rebalancing. But if borrowing costs affected the efficient frontier or sharpe ratios, then you'd see a much bigger drop off as you add leverage. The drop off we see is likely due to misfortunate rebalancing times.
Sharpe is (return - RFR) / (risk). However, the RFR we use should be our borrow rate. This is fundamental to the efficient frontier, because it assumes you can leverage up using the RFR. HOWEVER, the big nuance here is that traditional finance makes two faulty assumptions:
  • We actually can borrow at some theoretical risk-free rate. I believe in academia they typically recommend using the Fed Funds rate, or something similar.
  • More importantly - that the borrow rate is constant across assets.
As retail investors, we don't actually have access to the Fed Funds rate. And, as you've demonstrated with futures (which seems to be the cheapest financing accessible to retail investors), the borrow rate for different assets is different - higher risk assets require higher interest rates. Therefore, the Sharpe ratio is fundamentally flawed by assuming that one, constant RFR that's not even accessible to us. We should be using the implied financing rates as the RFR. What this means practically is that the true Sharpe ratios are lower than what's been presented previously, and my hypothesis is that it will continue to tip the scales in favor of ITTs.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

DMoogle wrote: Thu Sep 16, 2021 11:24 pm
skierincolorado wrote: Thu Sep 16, 2021 4:29 pm
DMoogle wrote: Thu Sep 16, 2021 4:19 pm Practically speaking, I wonder if the cost of leverage weighs largely in favor of ITTs. Sure, the implied financing rate of STT should be lower, but given you need more than 2x as much STT compared to ITT to get the same return, the levered Sharpe may end up being lower when that's put into consideration.
I don't think leverage affects sharpe ratios because sharpe ratios are calculated as return over the risk free rate. It might a little bit in PV because of the monthly rebalancing. But if borrowing costs affected the efficient frontier or sharpe ratios, then you'd see a much bigger drop off as you add leverage. The drop off we see is likely due to misfortunate rebalancing times.
Sharpe is (return - RFR) / (risk). However, the RFR we use should be our borrow rate. This is fundamental to the efficient frontier, because it assumes you can leverage up using the RFR. HOWEVER, the big nuance here is that traditional finance makes two faulty assumptions:
  • We actually can borrow at some theoretical risk-free rate. I believe in academia they typically recommend using the Fed Funds rate, or something similar.
  • More importantly - that the borrow rate is constant across assets.
As retail investors, we don't actually have access to the Fed Funds rate. And, as you've demonstrated with futures (which seems to be the cheapest financing accessible to retail investors), the borrow rate for different assets is different - higher risk assets require higher interest rates. Therefore, the Sharpe ratio is fundamentally flawed by assuming that one, constant RFR that's not even accessible to us. We should be using the implied financing rates as the RFR. What this means practically is that the true Sharpe ratios are lower than what's been presented previously, and my hypothesis is that it will continue to tip the scales in favor of ITTs.
You're right, but I'm not sure if the borrow rate on treasuries is really any higher than RFR. But yes add it to the list of reasons tipping towards ITT currently. That was one of the things Steve Reading said in the lifecycle thread in a conversation with EfficientInvestor who was advocating STTs. Extreme leverage of STTs is very sensitive to our assumptions. If our assumptions are even slightly off, the results are very different.
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

DMoogle wrote: Thu Sep 16, 2021 11:24 pm As retail investors, we don't actually have access to the Fed Funds rate. And, as you've demonstrated with futures (which seems to be the cheapest financing accessible to retail investors), the borrow rate for different assets is different - higher risk assets require higher interest rates. Therefore, the Sharpe ratio is fundamentally flawed by assuming that one, constant RFR that's not even accessible to us. We should be using the implied financing rates as the RFR. What this means practically is that the true Sharpe ratios are lower than what's been presented previously, and my hypothesis is that it will continue to tip the scales in favor of ITTs.
Would it be possible to edit the 3 month funds in the backtesting spreadsheets to account for a small markup? Just multiply everything by 1.05 or whatever figure feels appropriate based on the implied financing history.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

The easiest way to do it is to go to the Hard Cash column in raw data and change cell NR4 to 0.1 or 0.2 or whatever markup you want to apply to the total return rate for T-Bills. Then change cell NR8 to =NP8*(1+NR$4). Copy and paste that into the entire Hard Cash column. Now use hard cash as your leverage instead of T-Bills in the portfolio analysis pages. The additional 10% on financing does make all the sharpe ratios really close with LTT now in the lead.

The lesson perhaps being when the implied financing is rolling rich go LTT and when implied financing is rolling cheap go STT. Deleverage all methods to increase sharpe ratio when its rolling rich.

Image
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

It might make more sense to have a fixed rate above t-bills rather than a % markup. I’ll test that tomorrow.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

According to the link for implied repo rates supplied yesterday (w thanks) everything except for the 3 year future has an IRR below the 0.04% t-bill. The ultra bond is a whopping -0.36% IRR.

https://www.cmegroup.com/tools-informat ... ytics.html
55% VUG - 20% VEA - 20% EDV - 5% BNDX
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

LTCM wrote: Fri Sep 17, 2021 2:17 am The easiest way to do it is to go to the Hard Cash column in raw data and change cell NR4 to 0.1 or 0.2 or whatever markup you want to apply to the total return rate for T-Bills. Then change cell NR8 to =NP8*(1+NR$4). Copy and paste that into the entire Hard Cash column. Now use hard cash as your leverage instead of T-Bills in the portfolio analysis pages. The additional 10% on financing does make all the sharpe ratios really close with LTT now in the lead.

The lesson perhaps being when the implied financing is rolling rich go LTT and when implied financing is rolling cheap go STT. Deleverage all methods to increase sharpe ratio when its rolling rich.

Image
I added a fixed .1 for financing and got:

125/700 (STT): .54
125/175 (ITT): .49
125/80 (LTT): .48

The fixed amount is definitely best. The .1 was my best estimate, but there's some chance it's more. Upping to a more pessimistic .2 I get:

125/700 (STT): .51
125/175 (ITT): .49
125/80 (LTT): .47

Keep in mind that ITT in simba is 3-10 year equal weight. I'm still confident that a 5 year duration bond would have an equal or higher sharpe than STT, as shown by PV. PV gives a slightly higher sharpe to ITT (5-yr) since 1977 BEFORE figuring in higher implied financing. Figuring in the higher implied financing would widen the gap by .02-.04, giving a solid win to ITT (5-yr, not 3-10 yr). Although I get different results using the PV asset testing vs PV efficient frontier tool. The EF tool gives the win to ITT. The asset level modeling gives the win to STT, although the win is small enough that adding .1 or .2 to financing would probably flip it to ITT.
he400
Posts: 3
Joined: Sun Dec 27, 2020 12:46 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by he400 »

Thanks to Skier, Dmoogle and the rest for your detailed thoughts. I have been following along and it has been super helpful (along with the other thread about Lifecycle vs HEFA)

Quick question about margin rates, I have a portfolio of ~80k and considering switching to a 125 stocks / 200 mixed ITT / LTT portfolio (or 2x 70/30 as per the other thread).

As I'm trading from ex-US, I can access IBKR margin rates for this portfolio and don't have to content with cap gains taxes (although i'd have to worry about dividends taxes).

In this situation, given that I want to minimize my use of leveraged ETFs, should I use 1) IBKR margin (~2.5%) to lever up stock / bond etfs, 2) MES / ZF / ZN futures or 3) SPX box spreads to finance these? My concern with futures is that given my relative small portfolio value, rebalancing might be a little tricky, given the large notional value.

Thanks in advance!
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

he400 wrote: Fri Sep 17, 2021 12:43 pm Thanks to Skier, Dmoogle and the rest for your detailed thoughts. I have been following along and it has been super helpful (along with the other thread about Lifecycle vs HEFA)

Quick question about margin rates, I have a portfolio of ~80k and considering switching to a 125 stocks / 200 mixed ITT / LTT portfolio (or 2x 70/30 as per the other thread).

As I'm trading from ex-US, I can access IBKR margin rates for this portfolio and don't have to content with cap gains taxes (although i'd have to worry about dividends taxes).

In this situation, given that I want to minimize my use of leveraged ETFs, should I use 1) IBKR margin (~2.5%) to lever up stock / bond etfs, 2) MES / ZF / ZN futures or 3) SPX box spreads to finance these? My concern with futures is that given my relative small portfolio value, rebalancing might be a little tricky, given the large notional value.

Thanks in advance!
So if you're not in the US, then you may have access to different options than US folks do. For example, IBKR's margin benchmark is lower for EUR (-0.60%) than USD (0.08%). I'm not sure how different futures are, but in the Box Spreads thread, there was some discussion about Europe-specific box spreads that had a much lower implied financing rate.

Margin is easy and convenient, and still fairly cheap (should be 1.58% right now if you're IBKR Pro, which you should be). Futures are the cheapest, but yes you'll have to consider rebalancing issues with a small portfolio. Box spreads are kind of an in-between option, but are arguably more complicated to manage.

From a pure cost savings POV, futures are your best option due to the (lack of) tax implications.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

he400 wrote: Fri Sep 17, 2021 12:43 pm Thanks to Skier, Dmoogle and the rest for your detailed thoughts. I have been following along and it has been super helpful (along with the other thread about Lifecycle vs HEFA)

Quick question about margin rates, I have a portfolio of ~80k and considering switching to a 125 stocks / 200 mixed ITT / LTT portfolio (or 2x 70/30 as per the other thread).

As I'm trading from ex-US, I can access IBKR margin rates for this portfolio and don't have to content with cap gains taxes (although i'd have to worry about dividends taxes).

In this situation, given that I want to minimize my use of leveraged ETFs, should I use 1) IBKR margin (~2.5%) to lever up stock / bond etfs, 2) MES / ZF / ZN futures or 3) SPX box spreads to finance these? My concern with futures is that given my relative small portfolio value, rebalancing might be a little tricky, given the large notional value.

Thanks in advance!
80k should be large enough to manage rebalancing futures with enough granularity. If I’m not missing something on international tax implications that sounds best to me.

An example.. 50k vti, 5k vbr, 25k cash collateral for 2 Mes (45k) and one ZN or TN, or 2 zf.

One zn is like 1.4 zf. A tn is like 2zf. Obviously your positioning on the curve is different but the amount of risk you’d be taking in bonds is equivalent. I think the 1 zn gets you closest to 125/200 where the 200 is of 5 yr duration. We’re actively debating which duration is best and it’s mostly just splitting hairs. The big picture is to take some of your risk in bonds. When you have more money you can diversify across two or more durations.

Also consider bumping the stock to 130 or 140 based on the lifecycle vs hfea thread. Also per lifecycle investing principles, the less you are investing relative to future income the more leverage you should take

Personally I don’t worry too much that the aa is exactly target especially on the bond side. But with 80k you should be able to get very close if you want to
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

LTCM wrote: Fri Sep 17, 2021 4:11 am According to the link for implied repo rates supplied yesterday (w thanks) everything except for the 3 year future has an IRR below the 0.04% t-bill. The ultra bond is a whopping -0.36% IRR.

https://www.cmegroup.com/tools-informat ... ytics.html
Any thoughts on these Implied Repo Rates?

Image

Does that mean the futures market is paying us 0.31% to hold Ultra Bonds?
Does the futures buyer get the IRR at time of purchase or the avg of the IRR for the length of hold?
55% VUG - 20% VEA - 20% EDV - 5% BNDX
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

LTCM wrote: Fri Sep 17, 2021 2:27 pm
LTCM wrote: Fri Sep 17, 2021 4:11 am According to the link for implied repo rates supplied yesterday (w thanks) everything except for the 3 year future has an IRR below the 0.04% t-bill. The ultra bond is a whopping -0.36% IRR.

https://www.cmegroup.com/tools-informat ... ytics.html
Any thoughts on these Implied Repo Rates?

Image

Does that mean the futures market is paying us 0.31% to hold Ultra Bonds?
Does the futures buyer get the IRR at time of purchase or the avg of the IRR for the length of hold?
klaus and comeinvest and I discussed this in one of the threads. The rates seem to fluctuate wildly and don't make any sense. All we could conclude is that the rates displayed are somehow mistaken, or the buyer is somehow taking a risk that the CTD will change and the low (negative) IRR is compensation for the risk.

The two papers I've been posting on the long-term borrowing costs of Treasury futures and MES futures are what I've relied on to project borrowing costs.
HolyGrill
Posts: 52
Joined: Fri Feb 19, 2021 5:33 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by HolyGrill »

Hi O.P

I am very interested in this strategy. However I don’t know how to divide the $100k to AA150/300 by using futures. Can you suggest which ticker and what percentage should I allocate?
Thanks in advance
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

HolyGrill wrote: Fri Sep 17, 2021 11:14 pm Hi O.P

I am very interested in this strategy. However I don’t know how to divide the $100k to AA150/300 by using futures. Can you suggest which ticker and what percentage should I allocate?
Thanks in advance
There's some examples of this in the thread I think. Off the top of my head could do something like 55k VTI, 50k VXUS, 10k VBR, 45k Cash, 2 MES (45k), 3 ZF (300k). Or could do 1 ZF and 1 ZN. But make sure to read through not only this thread but some of the other threads and resources on futures and leverage so you know what you're getting into. Obviously you'll have to understand how and when to roll, how to rebalance, check your margin requirement, etc.
HolyGrill
Posts: 52
Joined: Fri Feb 19, 2021 5:33 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by HolyGrill »

Hi O.P

Thanks for the clear explanation. I think I won't participate at this moment until I can understand what it is. Thanks! :happy
constructor
Posts: 17
Joined: Fri Sep 03, 2021 6:18 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by constructor »

skierincolorado wrote: Fri Sep 17, 2021 4:54 pm
LTCM wrote: Fri Sep 17, 2021 2:27 pm
LTCM wrote: Fri Sep 17, 2021 4:11 am According to the link for implied repo rates supplied yesterday (w thanks) everything except for the 3 year future has an IRR below the 0.04% t-bill. The ultra bond is a whopping -0.36% IRR.

https://www.cmegroup.com/tools-informat ... ytics.html
Any thoughts on these Implied Repo Rates?

Image

Does that mean the futures market is paying us 0.31% to hold Ultra Bonds?
Does the futures buyer get the IRR at time of purchase or the avg of the IRR for the length of hold?
klaus and comeinvest and I discussed this in one of the threads. The rates seem to fluctuate wildly and don't make any sense. All we could conclude is that the rates displayed are somehow mistaken, or the buyer is somehow taking a risk that the CTD will change and the low (negative) IRR is compensation for the risk.

The two papers I've been posting on the long-term borrowing costs of Treasury futures and MES futures are what I've relied on to project borrowing costs.
UB December 2021 closed on Friday September 17 at 198'050 = 198.15625 according to my IBKR quote.

According to the CME Treasury Analytics the CTD conversion factor is 0.6141. So 198.15625 * 0.6141 = 121.687753125.

The challenge is sourcing bond quotes. In IBKR I have for "3 2/15/2047 912810RV2=" bid at 122.609 and ask at 122.729, mid 122.669.

Now I might be wrong here but I think treasury bond coupons are semi-annual, so there should be no coupon between now and December settlement for this bond that is due in February (so coupon in February and August? Is that how it works)? If this true, even if we are generous and look at the spot bid of 122.609, it is higher than the future price of 121.688, i.e. spot is more expensive than future.

The only inconsistency for this weekend is CME Analytics is listing the UB Implied Repo Rate at 1.10% this weekend (9/17/2021 5:10 PM CT). But I have done this exercise on other weekends and the spot price is always a tad bit higher than future price.

I might be wrong but it may be related this article in March 2021: https://www.bloomberg.com/news/articles ... g-u-s-repo
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

constructor wrote: Sat Sep 18, 2021 7:15 pm I might be wrong but it may be related this article in March 2021: https://www.bloomberg.com/news/articles ... g-u-s-repo
So basically the negative repo rate indicates a large short interest in the bond in question? Interesting.

The /UB is now indeed out to 1.1% IRR and the /ZB is down to -0.21% IRR.

Not sure what to do with that information other than realize it moves a lot. I guess you could just use whatever bond the market is most desperate to short and assume that's due to a structural imbalance. Get paid for providing the liquidity the market is requesting.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
Bentonkb
Posts: 83
Joined: Sun Mar 07, 2021 5:47 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Bentonkb »

LTCM wrote: Sat Sep 18, 2021 8:52 pm
constructor wrote: Sat Sep 18, 2021 7:15 pm I might be wrong but it may be related this article in March 2021: https://www.bloomberg.com/news/articles ... g-u-s-repo
So basically the negative repo rate indicates a large short interest in the bond in question? Interesting.

The /UB is now indeed out to 1.1% IRR and the /ZB is down to -0.21% IRR.

Not sure what to do with that information other than realize it moves a lot. I guess you could just use whatever bond the market is most desperate to short and assume that's due to a structural imbalance. Get paid for providing the liquidity the market is requesting.
I think the repo rate is the expected return for shorting the futures contract and going long on the bond. A negative repo rate in that case would mean that there are a large number of shorts on the contract, not the bond.

That might be backwards, but I'm 60% certain it is right. Not that it matters much. The negative repo rates situation has resolved itself now.
MeanVarianceOptimal
Posts: 10
Joined: Sun Nov 15, 2020 12:36 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by MeanVarianceOptimal »

If we're going to implement this with futures anyway, might it make sense to actually short LTT in addition to going (extra) long ITT? According to PV this would have actually improved the Sharpe ratio since 1995 compared to just going long ITT (assuming equal portfolio duration, using -25% LTT + 100% ITT compared to baseline). EDIT: going back to 1993 the sharpe ratio is about equal, though drawdown is still improved.

I'm particularly tempted to do something like this with Euro government bonds: there the carry on the 30y German bond is actually lower than on the 10y, which just seems wrong: https://www.ecb.europa.eu/stats/financi ... ex.en.html
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

Bentonkb wrote: Mon Sep 20, 2021 7:18 am
LTCM wrote: Sat Sep 18, 2021 8:52 pm
constructor wrote: Sat Sep 18, 2021 7:15 pm I might be wrong but it may be related this article in March 2021: https://www.bloomberg.com/news/articles ... g-u-s-repo
So basically the negative repo rate indicates a large short interest in the bond in question? Interesting.

The /UB is now indeed out to 1.1% IRR and the /ZB is down to -0.21% IRR.

Not sure what to do with that information other than realize it moves a lot. I guess you could just use whatever bond the market is most desperate to short and assume that's due to a structural imbalance. Get paid for providing the liquidity the market is requesting.
I think the repo rate is the expected return for shorting the futures contract and going long on the bond. A negative repo rate in that case would mean that there are a large number of shorts on the contract, not the bond.

That might be backwards, but I'm 60% certain it is right. Not that it matters much. The negative repo rates situation has resolved itself now.
But someone has to buy/sell the bond or take the risk eventually. So I think if there's demand to short the contract its a from a desire to borrow (and sell) the bond so they can buy it back later at a smaller price. Again...I think!
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

LTCM wrote: Thu Sep 16, 2021 3:01 am My current plan is to go 100/900 stocks/STT. 4xZT contracts which have a nominal value of 880,000 (I think) and then 98,000 VTI. I like that all the treasuries are futures and all the stock is ETF. I like the balance of 1:9. The math is easy. I like the backtesting. Best sharpe ratio since 1955 while keeping it simple. Minimal cash drag. Will sell VTI if margin called and rebalance every quarter as needed. I’d like to go over 100% VTI but I don’t think I can justify the increased volatility.

I’m going to road test in thinkorswim for a little while and then dive in.

Taking comments now!
Well this is going to take some fortitude. VTI down $3000. STT up $35.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
User avatar
Bentonkb
Posts: 83
Joined: Sun Mar 07, 2021 5:47 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Bentonkb »

LTCM wrote: Tue Sep 21, 2021 1:19 am
LTCM wrote: Thu Sep 16, 2021 3:01 am My current plan is to go 100/900 stocks/STT. 4xZT contracts which have a nominal value of 880,000 (I think) and then 98,000 VTI. I like that all the treasuries are futures and all the stock is ETF. I like the balance of 1:9. The math is easy. I like the backtesting. Best sharpe ratio since 1955 while keeping it simple. Minimal cash drag. Will sell VTI if margin called and rebalance every quarter as needed. I’d like to go over 100% VTI but I don’t think I can justify the increased volatility.

I’m going to road test in thinkorswim for a little while and then dive in.

Taking comments now!
Well this is going to take some fortitude. VTI down $3000. STT up $35.
This week is fine. It was last Friday that really hurt. Stocks, bonds, and gold were all down. Wiped out $20k of gains for me.
User avatar
millennialmillions
Posts: 187
Joined: Sun Aug 18, 2019 6:03 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

I'm the guy from the Lifecycle Investing vs. HFEA thread. After reading through this thread, I think we're largely working toward the same goal, so it would be useful to combine threads. Thanks to skier, DMoogle, LTCM, and all for your insightful posts!

Here is a recap of that thread and my current thinking:

I have been looking to find the best total portfolio strategy for my situation, testing various aspects of Lifecycle Investing, HFEA, and Modern Portfolio Theory. The HFEA analysis done in the past has focused on results for a single lump sump contribution over time. The Lifecycle Investing analysis did not consider holding bonds while leveraged. I wanted to consider both of these aspects looking at a 35-year accumulation period. So I built my own spreadsheet to do this analysis, using data back to 1955. The spreadsheet uses macros and is a bit messy - I might make it more user friendly if there's demand for it.

The spreadsheet includes both leveraged ETFs and leverage using margin, where any method can be simulated with a given cost of borrowing. Here is a recap of the results using margin. The first table uses T-Bill returns as the historical cost of borrowing, so this can be considered an optimistic cost of borrowing. The second table uses the 10-year treasury yield as the historical cost of borrowing. In recent times, this has been close to the cost of margin on Interactive Brokers, so it can be considered a pessimistic cost of borrowing.

Optimistic cost of borrowing
Image

Pessimistic cost of borrowing
Image

I did some additional analysis not included in that summary. I used leveraged ETFs for the S&P 500 and LTTs to see how those compared. Long story short, slightly worse than the pessimistic cost of borrowing. Since they're so easy to use, I don't think they should be completely written off. I also ran bootstrap-sampled simulations assuming every year is independent, whereas the above result uses historical 35-year periods. The bootstrap results unsurprisingly show a significantly worse 10th percentile but not much difference between strategies ($25M - $31M 10th percentile). So I am primarily looking at the results for historical 35-year periods.

I have been surprised that using a lifecycle strategy to decrease leverage has not resulted in a better 10th percentile result. The lifecycle with levered bonds shown above is simply the 140% VTSAX, 60% VLGSX portfolio with a gradual glide down in leverage approaching retirement. At the 10th percentile, it has performed worse than its constant counterpart and worse than a lifecycle strategy using no bonds while levered. I plan to dig into this more, but for now it doesn't really matter to me since the starting point is the same.

Looking at my results so far, I am leaning toward a 140% stock, 120% ITTs portfolio. It has performed well with a pessimistic cost of borrowing and exceptionally well with an optimistic cost of borrowing. There are some final things to think through (such as including international in the 140%), and I would appreciate any feedback from this group. As of now, I'm pretty close to making the decision on a 140% stock, 120% ITTs portfolio and turning my focus to implementation details. I am an options/futures/margin noob and have a lot to learn to minimize borrowing costs.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

millennialmillions wrote: Thu Sep 23, 2021 5:33 pm I'm the guy from the Lifecycle Investing vs. HFEA thread. After reading through this thread, I think we're largely working toward the same goal, so it would be useful to combine threads. Thanks to skier, DMoogle, LTCM, and all for your insightful posts!

Here is a recap of that thread and my current thinking:

I have been looking to find the best total portfolio strategy for my situation, testing various aspects of Lifecycle Investing, HFEA, and Modern Portfolio Theory. The HFEA analysis done in the past has focused on results for a single lump sump contribution over time. The Lifecycle Investing analysis did not consider holding bonds while leveraged. I wanted to consider both of these aspects looking at a 35-year accumulation period. So I built my own spreadsheet to do this analysis, using data back to 1955. The spreadsheet uses macros and is a bit messy - I might make it more user friendly if there's demand for it.

The spreadsheet includes both leveraged ETFs and leverage using margin, where any method can be simulated with a given cost of borrowing. Here is a recap of the results using margin. The first table uses T-Bill returns as the historical cost of borrowing, so this can be considered an optimistic cost of borrowing. The second table uses the 10-year treasury yield as the historical cost of borrowing. In recent times, this has been close to the cost of margin on Interactive Brokers, so it can be considered a pessimistic cost of borrowing.

Optimistic cost of borrowing
Image

Pessimistic cost of borrowing
Image

I did some additional analysis not included in that summary. I used leveraged ETFs for the S&P 500 and LTTs to see how those compared. Long story short, slightly worse than the pessimistic cost of borrowing. Since they're so easy to use, I don't think they should be completely written off. I also ran bootstrap-sampled simulations assuming every year is independent, whereas the above result uses historical 35-year periods. The bootstrap results unsurprisingly show a significantly worse 10th percentile but not much difference between strategies ($25M - $31M 10th percentile). So I am primarily looking at the results for historical 35-year periods.

I have been surprised that using a lifecycle strategy to decrease leverage has not resulted in a better 10th percentile result. The lifecycle with levered bonds shown above is simply the 140% VTSAX, 60% VLGSX portfolio with a gradual glide down in leverage approaching retirement. At the 10th percentile, it has performed worse than its constant counterpart and worse than a lifecycle strategy using no bonds while levered. I plan to dig into this more, but for now it doesn't really matter to me since the starting point is the same.

Looking at my results so far, I am leaning toward a 140% stock, 120% ITTs portfolio. It has performed well with a pessimistic cost of borrowing and exceptionally well with an optimistic cost of borrowing. There are some final things to think through (such as including international in the 140%), and I would appreciate any feedback from this group. As of now, I'm pretty close to making the decision on a 140% stock, 120% ITTs portfolio and turning my focus to implementation details. I am an options/futures/margin noob and have a lot to learn to minimize borrowing costs.
I agree it would be good to combine threads since they are very similar in goal. I've been meaning to dig more into some of the same things you mention but have been busy, but should have time this weekend. I think you are right about lifecycle vs constant not mattering a lot since the starting point is the same. I still want to see what the lifecycle book has to say about this. Hopefully some of the links in the OP and the rest of the thread are helpful re implementation.
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

I think the simple explanation is that, even when performance is poor, the long-term outperformance of a balanced leveraged portfolio is so good, that it performs better even in the 10% percentile, and even compared to a leveraged portfolio that delevers over time. If you shorten your time horizons, I suspect that would change.

skier/LTCM/millenial/anyone: what's the current thinking on optimal portfolio allocation? The hypothesis in the OP was that a 3:7 equities:ITTs was optimal (and maybe just do 1:2 for simplicity). I haven't thoroughly read every post in this thread - has that thinking changed since the OP? Doing a quarterly rebalance at the end of the month.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

DMoogle wrote: Fri Sep 24, 2021 3:53 pm I think the simple explanation is that, even when performance is poor, the long-term outperformance of a balanced leveraged portfolio is so good, that it performs better even in the 10% percentile, and even compared to a leveraged portfolio that delevers over time. If you shorten your time horizons, I suspect that would change.

skier/LTCM/millenial/anyone: what's the current thinking on optimal portfolio allocation? The hypothesis in the OP was that a 3:7 equities:ITTs was optimal (and maybe just do 1:2 for simplicity). I haven't thoroughly read every post in this thread - has that thinking changed since the OP? Doing a quarterly rebalance at the end of the month.
I'd say the 125/270 in the OP was pretty arbitrary .. it was just replacing the LTT in HFEA 2:1 with ITT.

There have been a wide range of estimates since then. On the low end, if you use interest rate forwards to project the return of bonds over the next several years, the efficient frontier might be nearly 100% stock. On the other hand the historical estimate since 1955, is near 1:2 using a 6.5 year duration from Simba's spreadsheet. The ratio would be higher - like 3:7 if using 5 year duration. millenialmillions proposes 140/120 a few posts up. I personally like 125/200 or 125/150 so far - a little below the historical efficient frontier. I do 1/3 of stock as international. LTCM proposes 1:9 stocks:STT.
Last edited by skierincolorado on Fri Oct 15, 2021 12:17 pm, edited 1 time in total.
User avatar
millennialmillions
Posts: 187
Joined: Sun Aug 18, 2019 6:03 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

I think there are many reasonable selections for the balance of stocks and ITT and trying to optimize using historical data is bound to overfit. That said, below are some results with varying allocations.

Optimistic cost of borrowing
Image

Pessimistic cost of borrowing
Image

Holding a higher ratio of ITT means more leverage, which is obviously sensitive to the cost of borrowing. I'm not sure about everyone else, but I will be implementing this in a portfolio that has a slight majority in regular taxable vs. tax advantaged, so I'm not ready to accept T-Bill yields as the complete cost of borrowing. That leads me to a more stock-heavy, lower leverage position.

I currently hold 30% of my stocks in international and am thinking something similar for this portfolio. Good to see skier is thinking similarly.
User avatar
LTCM
Posts: 412
Joined: Wed Sep 09, 2020 3:58 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

My "option buying power" dipped to -$154 on Friday. I deliberately left it to see what would happen. So far nothing. I don't know if that's because its paper trading or because it's too soon. I've submitted an unfilled order to sell 2 x VTI @ 229.55 but obviously that market is closed until Monday.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

Might switch from ZN to ZF with a little more weight when I rebalance this quarter for tax harvesting purposes. Maybe switch VT to VTI + VXUS as well?
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

DMoogle wrote: Tue Sep 28, 2021 1:08 pm Might switch from ZN to ZF with a little more weight when I rebalance this quarter for tax harvesting purposes. Maybe switch VT to VTI + VXUS as well?
Shouldn't have to move in order to TLH. Futures gains/losses are always marked to market at the end of the year and taxed, even if you don't sell, or roll to the same contract. Good idea on the equity portion though.
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

skierincolorado wrote: Tue Sep 28, 2021 6:00 pm
DMoogle wrote: Tue Sep 28, 2021 1:08 pm Might switch from ZN to ZF with a little more weight when I rebalance this quarter for tax harvesting purposes. Maybe switch VT to VTI + VXUS as well?
Shouldn't have to move in order to TLH. Futures gains/losses are always marked to market at the end of the year and taxed, even if you don't sell, or roll to the same contract. Good idea on the equity portion though.
Yeah I realized this like a half hour after I made this post... doesn't look like there's any volume yet in the next period's futures anyway.
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by adamhg »

I got lost in this thread when they were merged, but why project the cost of borrowing? With futures, you lock in your rate for a quarter. With box spreads, you lock it in for 2-3 years. Why not simply reevaluate the ideal leverage/AA ratios when you rebalance rather than use a suboptimal leverage/AA ratio for a quarter or more where your rate isn't actually changing? Or is the "cost of borrowing" used to project ITT returns?
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

adamhg wrote: Tue Sep 28, 2021 11:47 pm I got lost in this thread when they were merged, but why project the cost of borrowing? With futures, you lock in your rate for a quarter. With box spreads, you lock it in for 2-3 years. Why not simply reevaluate the ideal leverage/AA ratios when you rebalance rather than use a suboptimal leverage/AA ratio for a quarter or more where your rate isn't actually changing? Or is the "cost of borrowing" used to project ITT returns?
Sorry I'm not quite following your question.

The borrowing cost is important in backtesting to accurately calculate the total return.

Futures are generally better because the borrowing cost is lower than box spreads. Both because you are borrowing at the shorter rate (thus avoiding paying a term premium - longer term rates are higher even when rates aren't rising), and because the rates on box spreads aren't competitve. 2 year rates are less than the .7% people are getting right now. However box spreads are used in taxable accounts for the equity purchases because futures have poor tax treatment. I did a calculation higher up in the thread for the typical tax differences between buying equities with box spreads vs futures.

If one used futures to buy equities for the next 2 years you'd be borrowing at near 0% today and, according to interest rate forwards, around .7% 2 years from now. Your average would be substantially less than the .7% you'd get by locking in .7% for 2 years. On the other hand, you'll pay more in taxes most likely (depending on your tax situation).
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by adamhg »

skierincolorado wrote: Wed Sep 29, 2021 1:04 pm Sorry I'm not quite following your question.

The borrowing cost is important in backtesting to accurately calculate the total return.

Futures are generally better because the borrowing cost is lower than box spreads. Both because you are borrowing at the shorter rate (thus avoiding paying a term premium - longer term rates are higher even when rates aren't rising), and because the rates on box spreads aren't competitve. 2 year rates are less than the .7% people are getting right now. However box spreads are used in taxable accounts for the equity purchases because futures have poor tax treatment. I did a calculation higher up in the thread for the typical tax differences between buying equities with box spreads vs futures.

If one used futures to buy equities for the next 2 years you'd be borrowing at near 0% today and, according to interest rate forwards, around .7% 2 years from now. Your average would be substantially less than the .7% you'd get by locking in .7% for 2 years. On the other hand, you'll pay more in taxes most likely (depending on your tax situation).
Thank you. I think that clarifies it for me. I posted that in the middle of the night and misunderstood the spreadsheet results thinking it was projecting forward rates, not realizing it was backtesting with different borrowing rates. So that helps put it into context. The spreadsheet copy I downloaded was missing equations unfortunately and couldn't find the original upthread.

I'm still not sure about the future vs box argument. It should be the equivalent rate, maturity aside. If it was not, couldn't one simply arbitrage the rate difference by buying a box, shorting the underlying and buying the future at the same maturity as the box (I may have gotten the direction wrong)? But if you borrowed at the lower rate and sold the higher rate today, wouldn't you be able to immediately pocket the difference today in a risk free trade if the rates were different?

With that said, admittedly there could be a small difference going this direction, primarily being either the cost to short or the extrinsic value of an OTM put, which is closer to a 0.1% difference today and I think tax drag would be greater than that. At least, that's my analysis as to why I'd prefer to go the box route than futures... plus the whole automation part of it.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

adamhg wrote: Wed Sep 29, 2021 2:20 pm
skierincolorado wrote: Wed Sep 29, 2021 1:04 pm Sorry I'm not quite following your question.

The borrowing cost is important in backtesting to accurately calculate the total return.

Futures are generally better because the borrowing cost is lower than box spreads. Both because you are borrowing at the shorter rate (thus avoiding paying a term premium - longer term rates are higher even when rates aren't rising), and because the rates on box spreads aren't competitve. 2 year rates are less than the .7% people are getting right now. However box spreads are used in taxable accounts for the equity purchases because futures have poor tax treatment. I did a calculation higher up in the thread for the typical tax differences between buying equities with box spreads vs futures.

If one used futures to buy equities for the next 2 years you'd be borrowing at near 0% today and, according to interest rate forwards, around .7% 2 years from now. Your average would be substantially less than the .7% you'd get by locking in .7% for 2 years. On the other hand, you'll pay more in taxes most likely (depending on your tax situation).
Thank you. I think that clarifies it for me. I posted that in the middle of the night and misunderstood the spreadsheet results thinking it was projecting forward rates, not realizing it was backtesting with different borrowing rates. So that helps put it into context. The spreadsheet copy I downloaded was missing equations unfortunately and couldn't find the original upthread.

I'm still not sure about the future vs box argument. It should be the equivalent rate, maturity aside. If it was not, couldn't one simply arbitrage the rate difference by buying a box, shorting the underlying and buying the future at the same maturity as the box (I may have gotten the direction wrong)? But if you borrowed at the lower rate and sold the higher rate today, wouldn't you be able to immediately pocket the difference today in a risk free trade if the rates were different?

With that said, admittedly there could be a small difference going this direction, primarily being either the cost to short or the extrinsic value of an OTM put, which is closer to a 0.1% difference today and I think tax drag would be greater than that. At least, that's my analysis as to why I'd prefer to go the box route than futures... plus the whole automation part of it.
I think the rate is not competive but there's no arbitrage opp because box spread market is not very liquid with wide bid-ask spreads. If you bought a box, I don't think you'd get 0.7%.

Whatever the cause, the .7% rates people were getting last week on 1-2 year boxes are definitely high. Even today, the 2 year rate is 0.3%. That's a .4% premium - and probably more because rates were lower last week and some of the boxes were for less than 2 years of duration.

Also keep in mind the 2-yr rate of 0.3% is higher than the average expected short-term rate, because of the term-premium. The market likely expects short term rates to average ~0.2% over the next 2 years, and then there's a 0.1% term premium.

In total, over the course of the next 2 years, I'd expect a total borrowing cost from futures of around 0.2% (0.05% for the next 9-12 months and then gradually rising to 0.75%). So by paying 0.7%, one is overpaying by 0.5%. .4% is because it's just not a competitive rate - a good 2 year rate would be 0.3%. And .1% is the term premium. The term premium could be mostly avoided by rolling shorter boxes of 1 year duration, but there might be more transaction costs.

Paying an extra 0.5% for leverage will add up over time. The tax costs of futures in taxable accounts probably exceed this slightly, so box spreads in taxable make sense. But in tax-advantaged, the very clear choice IMO is futures. The primary reason seems to be that 2 year box spread rates don't seem to be competitive with 2 year market interest rates. If you could figure out how to write boxes and get near market interest rates of 0.3% then boxes might make sense.

Also you can't write boxes in IRAs anyways.
User avatar
millennialmillions
Posts: 187
Joined: Sun Aug 18, 2019 6:03 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

I'm preparing to shift my portfolio into 140% stocks, 120% ITT (very loosely defined). I would greatly appreciate if anyone could review my current situation and poke holes in my plan.

Here is a list of current accounts and balances, combining mine and my wife's accounts:
  • Regular taxable: $550,000. All domestic equity, most with significant unrealized gains. Currently at Fidelity but am in process of moving to IBKR.
  • Roth IRAs at Fidelity: $215,000. Can buy leveraged ETFs but not futures. Plan to transfer to IBKR soon.
  • Solo 401k at Fidelity: $180,000. Can buy leveraged ETFs but not futures. May transfer to an IBKR IRA in the future, but I currently have access to the mega backdoor Roth and don't want to close that.
  • Current employer 401ks and HSAs: $280,000. No access to leveraged ETFs or futures.
  • Total = $1,225,000
My short-term goal is to get somewhere close to a 140% stock (98% domestic, 42% international), 120% ITT portfolio without getting in over my head and changing everything at once. For simplicity, I'm assuming LTT is worth twice ITT in terms of treasury allocation (the backtesting results were close enough for me). Here is my short-term plan:

Regular taxable IBKR margin account:
  • $550,000 domestic equities
  • $400,000 ITT (4 ZFs)
  • $20,000 cash (collateral)
  • $230,000 international equities
Roth IRAs at Fidelity:
  • $36,000 UPRO ($108,000 domestic equities)
  • $179,000 TMF ($537,000 LTT)
Solo 401k at Fidelity:
  • $180,000 UPRO ($540,000 domestic equities)
Current employer 401ks and HSAs:
  • $280,000 international equities
Portfolio totals:
  • My total equity = $1,245,000
  • Domestic equity holdings = $1,198,000 (96%)
  • International equity holdings = $510,000 (41%)
  • ITT holdings = $400,000 (32%)
  • LTT holdings = $537,000 (86% if we count as double ITT)


I know the above is not optimized for borrowing costs or for treasury duration. However, it seems close enough for a starting point, and I think all the suboptimal elements can be changed later without any real tax consequences. I plan to test the IBKR account using a paper account first, since I've never traded futures or used portfolio margin. I will then proceed in my real account. After I feel comfortable with that, I will plan to do box spreads in taxable and transfer the Roth IRAs to IBKR to buy ZF and MES instead of TMF and UPRO.

Questions I have:
  • Am I thinking amount the amount of ZF correctly? I want $400,000 of exposure, so I buy 4 contracts with a par value of $100,000 each? Bentonkb mentions in this post that a lot of people use the settlement price as the notional value?
  • How much collateral should I hold in cash for ZF? Can I hold extra in something like ICASH and set to liquidate first in case of margin call? Or will the futures automatically be liquidated first if I fall below their maintenance margin?
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by adamhg »

millennialmillions wrote: Wed Sep 29, 2021 9:43 pm
Roth IRAs at Fidelity:
  • $36,000 UPRO ($108,000 domestic equities)
  • $179,000 TMF ($537,000 LTT)
Solo 401k at Fidelity:
  • $180,000 UPRO ($540,000 domestic equities)
Current employer 401ks and HSAs:
  • $280,000 international equities
It doesn't work this way at the portfolio level unless you plan to backdoor Roth on your first rebalance. You need each separate, impermeable account type weighted independently. Otherwise when UPRO tanks, you're left without your bond portion in your 401k and you're effectively 3x levered in SPY and can't access the TMF sitting in your Roth to rebalance. Now try your back tests with each asset class independent and see if it matches your expectations
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

millennialmillions wrote: Wed Sep 29, 2021 9:43 pm I'm preparing to shift my portfolio into 140% stocks, 120% ITT (very loosely defined). I would greatly appreciate if anyone could review my current situation and poke holes in my plan.

Here is a list of current accounts and balances, combining mine and my wife's accounts:
  • Regular taxable: $550,000. All domestic equity, most with significant unrealized gains. Currently at Fidelity but am in process of moving to IBKR.
  • Roth IRAs at Fidelity: $215,000. Can buy leveraged ETFs but not futures. Plan to transfer to IBKR soon.
  • Solo 401k at Fidelity: $180,000. Can buy leveraged ETFs but not futures. May transfer to an IBKR IRA in the future, but I currently have access to the mega backdoor Roth and don't want to close that.
  • Current employer 401ks and HSAs: $280,000. No access to leveraged ETFs or futures.
  • Total = $1,225,000
My short-term goal is to get somewhere close to a 140% stock (98% domestic, 42% international), 120% ITT portfolio without getting in over my head and changing everything at once. For simplicity, I'm assuming LTT is worth twice ITT in terms of treasury allocation (the backtesting results were close enough for me). Here is my short-term plan:

Regular taxable IBKR margin account:
  • $550,000 domestic equities
  • $400,000 ITT (4 ZFs)
  • $20,000 cash (collateral)
  • $230,000 international equities
Roth IRAs at Fidelity:
  • $36,000 UPRO ($108,000 domestic equities)
  • $179,000 TMF ($537,000 LTT)
Solo 401k at Fidelity:
  • $180,000 UPRO ($540,000 domestic equities)
Current employer 401ks and HSAs:
  • $280,000 international equities
Portfolio totals:
  • My total equity = $1,245,000
  • Domestic equity holdings = $1,198,000 (96%)
  • International equity holdings = $510,000 (41%)
  • ITT holdings = $400,000 (32%)
  • LTT holdings = $537,000 (86% if we count as double ITT)


I know the above is not optimized for borrowing costs or for treasury duration. However, it seems close enough for a starting point, and I think all the suboptimal elements can be changed later without any real tax consequences. I plan to test the IBKR account using a paper account first, since I've never traded futures or used portfolio margin. I will then proceed in my real account. After I feel comfortable with that, I will plan to do box spreads in taxable and transfer the Roth IRAs to IBKR to buy ZF and MES instead of TMF and UPRO.

Questions I have:
  • Am I thinking amount the amount of ZF correctly? I want $400,000 of exposure, so I buy 4 contracts with a par value of $100,000 each? Bentonkb mentions in this post that a lot of people use the settlement price as the notional value?
  • How much collateral should I hold in cash for ZF? Can I hold extra in something like ICASH and set to liquidate first in case of margin call? Or will the futures automatically be liquidated first if I fall below their maintenance margin?
Since it's a taxable account with margin, you don't need to hold cash collateral for futures. It just adds to your margin requirements. In your example with 550k equity, and holding 550k domestic + 230k intl + 400k ZF, if it's Reg T, the margin req would be .25*780k + ~1k per ZF. Since the 550k in equity is much more than that, you'd have a lot of excess liquidity. You'd have a 230k margin loan at 1.5-2.5% depending on which IBKR plan you have. This would drop to ~.7% if/when you write a 230k box spread.

In terms of risk, the LTT are at least 3 times or more risk, not just 2x. This may be why you find them to be not that much inferior in your backtests. In a backtest substituting at 3x (or arguably 4x) the ITT will win substantially. The risk is proportional to the duraion, and ZF are less than 5 years, while TMF is 19 years. Holding 537k of LTT may be more risk than you were intending if you were considering it equivalent to ~1.1M of ITT.

Also keep in mind that while over short periods different parts of the yield curve can behave differently. By starting with LTT and then switching to ITT you'd open yourself up to the risk that LTT do poorly while you hold them, and then ITT do poorly after you switch. The 0.9% fees on TMF and UPRO I think are very problematic long-term, but less problematic over the short-term. I feel that you could justify the fees for the simplisity while you learn, but I would have a hard time justifying the risk of switching between LTT and ITT, or the much lower sharpe ratio of LTT - it's either more risk than you were intending, or less expected return.

Like you I have multiple accounts, some leveraged, some not. Some are 100% equities, some are mixed. I think this works out but make sure you think through some examples of either bonds or stocks tanking and how you would rebalance across your accounts. I don't think I share adamhg's concern but it's worth considering.

Most HSAs and 401ks at Fidelity will allow for options trading, which would allow you to buy LEAPS. You probably have enough in the taxable and IRAs that you can just do futures and box spreads in those accounts, and avoid both LETFs and LEAPS. But I'd do LEAPS before doing LETFS. It also might be a good idea to have the options privileges turned on in the case of a major market crash requiring you to spread your leverage out across your accounts more evenly.

I am curious when you say you have access to megabackdoor, do you mean you have after-tax dollars you have not converted to Roth yet in a former employer 401k? Convert them!

Also congrats on your timing luck in getting started on this after the sharp selloff in bonds!
Last edited by skierincolorado on Wed Sep 29, 2021 10:40 pm, edited 1 time in total.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

adamhg wrote: Wed Sep 29, 2021 9:57 pm

It doesn't work this way at the portfolio level unless you plan to backdoor Roth on your first rebalance. You need each separate, impermeable account type weighted independently. Otherwise when UPRO tanks, you're left without your bond portion in your 401k and you're effectively 3x levered in SPY and can't access the TMF sitting in your Roth to rebalance. Now try your back tests with each asset class independent and see if it matches your expectations
I'm not sure I see your point.

Let's say I have 100k TMF in IRA and 100k UPRO in taxable. If the UPRO tanked, I would sell TMF in the IRA and buy UPRO in the IRA. The same as if they were in the same account.

I do find it kind of an unneccesary risk in terms of what if stocks do much better than bonds the next 30 years, or vice-versa. My taxable account might do much better than my IRA. That's an avoidable risk. Personally I have a have 5 accounts (4 account types) and in most of them I hold stocks and bonds, but some of them are just stocks. So I make some effort to spread the risk around across accounts, but I don't worry about it too much and I definitely don't try to make it equal.
hdas
Posts: 1395
Joined: Thu Jun 11, 2015 8:24 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

skierincolorado wrote: Wed Sep 29, 2021 1:04 pm If one used futures to buy equities for the next 2 years you'd be borrowing at near 0% today and, according to interest rate forwards, around .7% 2 years from now.
H
Last edited by hdas on Tue Oct 26, 2021 6:32 pm, edited 1 time in total.
....
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

hdas wrote: Wed Sep 29, 2021 10:47 pm
skierincolorado wrote: Wed Sep 29, 2021 1:04 pm If one used futures to buy equities for the next 2 years you'd be borrowing at near 0% today and, according to interest rate forwards, around .7% 2 years from now.
Where did you get this notion from? Have you seen the CME tool tracking the implied financing rate?
Which tool are you referring to? The IRR on this tool is generally close to zero currently: https://www.cmegroup.com/tools-informat ... ytics.html

The implied financing rates are near the 3-mo T-bill rate usually. See these two papers:

https://www.financialresearch.gov/brief ... Trades.pdf
https://www.cmegroup.com/trading/equity ... -etfs.html

Interest rate forwards project the 3-month T-bill to be around .7% 2 years from now.
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by adamhg »

skierincolorado wrote: Wed Sep 29, 2021 10:34 pm

I'm not sure I see your point.

Let's say I have 100k TMF in IRA and 100k UPRO in taxable. If the UPRO tanked, I would sell TMF in the IRA and buy UPRO in the IRA. The same as if they were in the same account.

I do find it kind of an unneccesary risk in terms of what if stocks do much better than bonds the next 30 years, or vice-versa. My taxable account might do much better than my IRA. That's an avoidable risk. Personally I have a have 5 accounts (4 account types) and in most of them I hold stocks and bonds, but some of them are just stocks. So I make some effort to spread the risk around across accounts, but I don't worry about it too much and I definitely don't try to make it equal.
You're right. I'm thinking of my leverage ratio, but at 140% there's little risk of a total loss especially with the letfs, and if you're not afraid of some lopsided gains, it should be the same.
hdas
Posts: 1395
Joined: Thu Jun 11, 2015 8:24 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

skierincolorado wrote: Wed Sep 29, 2021 11:47 pm
Which tool are you referring to? The IRR on this tool is generally close to zero currently: https://www.cmegroup.com/tools-informat ... ytics.html

The implied financing rates are near the 3-mo T-bill rate usually. See these two papers:

https://www.financialresearch.gov/brief ... Trades.pdf
https://www.cmegroup.com/trading/equity ... -etfs.html

Interest rate forwards project the 3-month T-bill to be around .7% 2 years from now.
H
Last edited by hdas on Tue Oct 26, 2021 6:33 pm, edited 1 time in total.
....
User avatar
millennialmillions
Posts: 187
Joined: Sun Aug 18, 2019 6:03 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

Thanks Adam and Skier for your review. Skier, would it be accurate to say if you were in my situation, you would move the Roth IRAs to IBKR now and buy ZF and MES instead of TMF and UPRO?
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm In terms of risk, the LTT are at least 3 times or more risk, not just 2x. This may be why you find them to be not that much inferior in your backtests. In a backtest substituting at 3x (or arguably 4x) the ITT will win substantially. The risk is proportional to the duraion, and ZF are less than 5 years, while TMF is 19 years. Holding 537k of LTT may be more risk than you were intending if you were considering it equivalent to ~1.1M of ITT.
I understand your point, but I've been defining "risk" differently than most. Risk to me is the lower percentiles at the end of a 35-year period. The plan I've outlined is essentially a blend of the LETF approach and ITT margin approach I simulated. I also simulated this exact mix, and the results were as expected: better than using all LETFs and worse than using solely ITT with a low cost of borrowing.
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm Also keep in mind that while over short periods different parts of the yield curve can behave differently. By starting with LTT and then switching to ITT you'd open yourself up to the risk that LTT do poorly while you hold them, and then ITT do poorly after you switch.
This is a risk I hadn't really considered and weakens my previous point about thinking of risk across 35 years. Good callout.
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm I am curious when you say you have access to megabackdoor, do you mean you have after-tax dollars you have not converted to Roth yet in a former employer 401k? Convert them!
No, I mean I am actively contributing after-tax dollars to my company 401k and then quickly converting to a Roth IRA. I thought that having funds in a traditional IRA would subject me to pro-rata tax issues, like the regular backdoor Roth. However, your question prompted me to check, and it looks like I was wrong, as long as I'm converting directly to a Roth IRA. So the only backdoor I'd be closing by transferring my 401ks to IRAs at IBKR is the regular backdoor. It makes the decision closer...I'll need to consider more and see whether I can keep the regular backdoor Roth open and still get the overall leverage I want.
User avatar
dc93
Posts: 15
Joined: Tue May 25, 2021 9:33 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by dc93 »

skierincolorado wrote: Wed Sep 29, 2021 10:34 pm
adamhg wrote: Wed Sep 29, 2021 9:57 pm

It doesn't work this way at the portfolio level unless you plan to backdoor Roth on your first rebalance. You need each separate, impermeable account type weighted independently. Otherwise when UPRO tanks, you're left without your bond portion in your 401k and you're effectively 3x levered in SPY and can't access the TMF sitting in your Roth to rebalance. Now try your back tests with each asset class independent and see if it matches your expectations
I'm not sure I see your point.

Let's say I have 100k TMF in IRA and 100k UPRO in taxable. If the UPRO tanked, I would sell TMF in the IRA and buy UPRO in the IRA. The same as if they were in the same account.

I do find it kind of an unneccesary risk in terms of what if stocks do much better than bonds the next 30 years, or vice-versa. My taxable account might do much better than my IRA. That's an avoidable risk. Personally I have a have 5 accounts (4 account types) and in most of them I hold stocks and bonds, but some of them are just stocks. So I make some effort to spread the risk around across accounts, but I don't worry about it too much and I definitely don't try to make it equal.
Hi skierincolorado,
Thanks for your excellent post! I have a question that may be relevant here:
What's the most tax-efficient way to implement HFEA in two or more accounts?

I had an earlier post in the HFEA thread: viewtopic.php?p=6110148#p6110148
Here I assumed that initially we put an equal amount of money ($10k) in taxable and Roth IRA, both in a 55/45 split. When we rebalance, we never touch the taxable part and only adjust the portion in Roth to make the overall asset allocation 55/45.

Ideally, I want more money in Roth IRA if possible, and avoid large realized gains in the taxable account (that could happen when there is a huge imbalance between the two accounts that making roth 100% on one of UPRO/TMF wouldn't suffice for the purpose of rebalancing).

The backtest result of this strategy (back to 2009) suggest that it works fine for 12 years, and ~65% money does end up in Roth. But there are many moving pieces in my experiment that has the potential to improve the tax efficiency:
(1) What if we have more cash flow? (e.g. $6000 yearly contribution to Roth)
(2) What if the amounts in Roth/taxable are unequal?
(3) Will this strategy break down in a longer time horizon?
(4) Instead of 55/45 on both accounts, should we start with a different allocation?

I don't have a good intuition about the answers to these questions, maybe I should just do more back-testing. I would really appreciate comments and suggestions if folks here are interested.

Best,
dc93
User avatar
dc93
Posts: 15
Joined: Tue May 25, 2021 9:33 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by dc93 »

Just ran another backtest - seems like putting more UPRO in Roth is much better.
Starting balance in 2009:
Taxable: 1k UPRO/9k TMF
Roth IRA: 10k UPRO
Ending balance in 2021:
Taxable: 48k UPRO/30k TMF
Roth IRA: 405k UPRO/326k TMF
More than 90% ended up in Roth IRA.
I guess starting at 2009 definitely helped here - if we started at March 2020 (major drop in UPRO right at the beginning), then we may have to sell TMF in taxable to buy more UPRO.
Last edited by dc93 on Thu Sep 30, 2021 12:18 pm, edited 1 time in total.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

millennialmillions wrote: Thu Sep 30, 2021 10:03 am Thanks Adam and Skier for your review. Skier, would it be accurate to say if you were in my situation, you would move the Roth IRAs to IBKR now and buy ZF and MES instead of TMF and UPRO?
Personally, yes, I skipped straight to boxes, MES, and ZF. It's a valid concern though. What I did is just buy 1 contract and added contracts over a couple months as I got more comfortable. If you were going to use LETFs, I would probably use TYD instead of TMF. Or I just wouldn't use very much and would switch to ZF/MES/boxes as soon as possible. I have a real problem with the fees and with LTT.
millennialmillions wrote: Thu Sep 30, 2021 10:03 am
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm In terms of risk, the LTT are at least 3 times or more risk, not just 2x. This may be why you find them to be not that much inferior in your backtests. In a backtest substituting at 3x (or arguably 4x) the ITT will win substantially. The risk is proportional to the duraion, and ZF are less than 5 years, while TMF is 19 years. Holding 537k of LTT may be more risk than you were intending if you were considering it equivalent to ~1.1M of ITT.
I understand your point, but I've been defining "risk" differently than most. Risk to me is the lower percentiles at the end of a 35-year period. The plan I've outlined is essentially a blend of the LETF approach and ITT margin approach I simulated. I also simulated this exact mix, and the results were as expected: better than using all LETFs and worse than using solely ITT with a low cost of borrowing.
Right, but under this definition of risk, the more ITT we hold (up to a point), the higher the 10th percentile, and the lower the "risk." I assume you're substituting ITT for LTT at 2:1 because they produce equivalent 10th percentiles. But adding more ITT *raises* the 10th percentile instead of lowering it, at least until 200%+ ITT. Here is a graph of the 10th percentile for 140% stock vs various percents of ITT and LTT. We can see that a 60% LTT allocation has the same 10th percentile as a 350% ITT allocation. For the same risk (same 10th percentile), the 50th percentile is 231M vs 800M. From this chart, using your definition of risk, we would infer that 140/60 LTT is the same risk as 140/350 ITT, but the ITT has a vastly suprior 50th percntile. That's over a 5:1 ratio, not 2:1.

Personally, I think 140/120 is perfectly reasonable - it's just not equivalent to 140/60 LTT by any definition of risk. I'd say it's more like 140/40. So if you do use TMF temporarily, you won't need as much. Personally, I'd favor a little more ITT than 140/120, but I think 140/120 is close enough to the peak of the graph below. Personally I'd do 140/200 because the 50th percentiles are much much higher. We can really explode the 50th percentile by going to 140/280, or 140/350, and that's what the HFEA people seem to want (but less effectively because they are using garbage LTT). But like you, I'd rather err on the lower end.

Image
millennialmillions wrote: Thu Sep 30, 2021 10:03 am
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm Also keep in mind that while over short periods different parts of the yield curve can behave differently. By starting with LTT and then switching to ITT you'd open yourself up to the risk that LTT do poorly while you hold them, and then ITT do poorly after you switch.
This is a risk I hadn't really considered and weakens my previous point about thinking of risk across 35 years. Good callout.
skierincolorado wrote: Wed Sep 29, 2021 10:15 pm I am curious when you say you have access to megabackdoor, do you mean you have after-tax dollars you have not converted to Roth yet in a former employer 401k? Convert them!
No, I mean I am actively contributing after-tax dollars to my company 401k and then quickly converting to a Roth IRA. I thought that having funds in a traditional IRA would subject me to pro-rata tax issues, like the regular backdoor Roth. However, your question prompted me to check, and it looks like I was wrong, as long as I'm converting directly to a Roth IRA. So the only backdoor I'd be closing by transferring my 401ks to IRAs at IBKR is the regular backdoor. It makes the decision closer...I'll need to consider more and see whether I can keep the regular backdoor Roth open and still get the overall leverage I want.
I see that makes more sense. I would be concerned about closing off a backdoor roth as well - if that's something you are eligible for. If Congress closes the backdoor roth as planned, it wouldn't be a factor at that point.


It appears you have access to futures and box spreads in 765k of accounts out of 1.25M. You might not need to leverage the 401ks/HSAs. You already have LETFs available to you in the old 401k, if you need to spread your leverage out in a crash. I'd check to see if you can do options trading in the new 401k, which would allow you to buy a LEAP if necessary. But the 765k should be enough already, with the old 401k as backup.
Last edited by skierincolorado on Thu Sep 30, 2021 1:33 pm, edited 1 time in total.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

dc93 wrote: Thu Sep 30, 2021 11:24 am
skierincolorado wrote: Wed Sep 29, 2021 10:34 pm
adamhg wrote: Wed Sep 29, 2021 9:57 pm

It doesn't work this way at the portfolio level unless you plan to backdoor Roth on your first rebalance. You need each separate, impermeable account type weighted independently. Otherwise when UPRO tanks, you're left without your bond portion in your 401k and you're effectively 3x levered in SPY and can't access the TMF sitting in your Roth to rebalance. Now try your back tests with each asset class independent and see if it matches your expectations
I'm not sure I see your point.

Let's say I have 100k TMF in IRA and 100k UPRO in taxable. If the UPRO tanked, I would sell TMF in the IRA and buy UPRO in the IRA. The same as if they were in the same account.

I do find it kind of an unneccesary risk in terms of what if stocks do much better than bonds the next 30 years, or vice-versa. My taxable account might do much better than my IRA. That's an avoidable risk. Personally I have a have 5 accounts (4 account types) and in most of them I hold stocks and bonds, but some of them are just stocks. So I make some effort to spread the risk around across accounts, but I don't worry about it too much and I definitely don't try to make it equal.
Hi skierincolorado,
Thanks for your excellent post! I have a question that may be relevant here:
What's the most tax-efficient way to implement HFEA in two or more accounts?

I had an earlier post in the HFEA thread: viewtopic.php?p=6110148#p6110148
Here I assumed that initially we put an equal amount of money ($10k) in taxable and Roth IRA, both in a 55/45 split. When we rebalance, we never touch the taxable part and only adjust the portion in Roth to make the overall asset allocation 55/45.

Ideally, I want more money in Roth IRA if possible, and avoid large realized gains in the taxable account (that could happen when there is a huge imbalance between the two accounts that making roth 100% on one of UPRO/TMF wouldn't suffice for the purpose of rebalancing).

The backtest result of this strategy (back to 2009) suggest that it works fine for 12 years, and ~65% money does end up in Roth. But there are many moving pieces in my experiment that has the potential to improve the tax efficiency:
(1) What if we have more cash flow? (e.g. $6000 yearly contribution to Roth)
(2) What if the amounts in Roth/taxable are unequal?
(3) Will this strategy break down in a longer time horizon?
(4) Instead of 55/45 on both accounts, should we start with a different allocation?

I don't have a good intuition about the answers to these questions, maybe I should just do more back-testing. I would really appreciate comments and suggestions if folks here are interested.

Best,
dc93
Well first I'd make my usual point which I'm sure you know if you've read my other posts. I don't love HFEA because of the high fees and because LTT are very inferior to ITT. That being said, we're talking about the same thing in terms of keeping similar returns across our accounts. There's no way to make more money in the Roth without also taking more risk in the Roth. Of course over very long time horizons, the risk should pay off. So from that perspective, it would be best to do mostly TMF in taxable, and 100% UPRO in Roth.

I think your backtest would breakdown. For example, if we start with 10k in each and balanced 55/45 in both, it would only take a ~50% drop in UPRO before you were 100% UPRO in your Roth. If UPRO dropped 50% again, as it did in 2008-9, your Roth would now be quite small. Of course in the long-run it should pay off since UPRO should rise more. So I think this scenario is fine.

The worst scenario I think is if UPRO went up very quickly initially, you would end up 100% TMF in the Roth. In this case, I would probably rebalance in taxable to get some UPRO back into the Roth. To avoid this, I think it would be best to start with more of the UPRO in the roth. This is consistent with the initial point of taking more risk in the Roth.

When did your backtest start in 2009? I am surprised it avoided this scenario. I think if you started in March 2009 or April 2020, you'd end up 100% TMF in the Roth, or close to it, which would be undesirable long term.

I'd probably start 80/20 UPRO/TMF in the Roth, and 30/70 UPRO/TMF in taxable. Or 70/30 and 40/60. Basically tilting to UPRO in Roth to avoid this scenario.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

dc93 wrote: Thu Sep 30, 2021 12:05 pm Just ran another backtest - seems like putting more UPRO in Roth is much better.
Starting balance in 2009:
Taxable: 1k UPRO/9k TMF
Roth IRA: 10k UPRO
Ending balance in 2021:
Taxable: 48k UPRO/30k TMF
Roth IRA: 405k UPRO/326k TMF
More than 90% ended up in Roth IRA.
I guess starting at 2009 definitely helped here - if we started at March 2020 (major drop in UPRO right at the beginning), then we may have to sell TMF in taxable to buy more UPRO.
I missed this post, but came to the same conclusion. I wouldn't be too concerned about ending up 100% UPRO in the Roth during a market drop. Eventually it will come back. The real concern is ending up 100% TMF in the Roth. We don't want that. It's best to tilt towards UPRO initially in the Roth. At least 70%, but 100% would be fine too. Selling some TMF in taxable initially won't be that bad in the long run. Even better, you could harvest the losses on UPRO to offset. Could learn to use futures, boxes, or IB broker margin to avoid a wash sale. I guess you'd need at least 10% UPRO in taxable initially so that you'd have losses to harvest.

I think I'd still stick with 80/20 (Roth) and 30/70 (taxable). The 30% UPRO in the taxable initially would allow you to TLH.
Topic Author
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

hdas wrote: Thu Sep 30, 2021 9:15 am
skierincolorado wrote: Wed Sep 29, 2021 11:47 pm
Which tool are you referring to? The IRR on this tool is generally close to zero currently: https://www.cmegroup.com/tools-informat ... ytics.html

The implied financing rates are near the 3-mo T-bill rate usually. See these two papers:

https://www.financialresearch.gov/brief ... Trades.pdf
https://www.cmegroup.com/trading/equity ... -etfs.html

Interest rate forwards project the 3-month T-bill to be around .7% 2 years from now.
I'm referring to the implied financing tool in the Equity Q Roll analyzer for EQUITY FUTURES, since you made the assertion that you can pay basically no interest on a long term equity long position in futures. I think currently you are paying 2.5-3 basis point ABOVE libor. I haven't done the calculations, or seen them anywhere for treasury futures, perhaps the situation is different there. And even in that CME pamphlet you can see that holding futures for the long term (fully funded) it's a bad idea, the 3month bill investment of the collateral doesn't cover the vig. H
Yes, the "near 0%" language was sloppy. It's probably more like .3-.4% today, rising to .7-.9% 2 years from now. Historically, the implied financing was equal to LIBOR from 2002-2012. It's been a bit higher recently you are correct. Anyways, the point is the same. Box spreads are best in taxable because the tax treatment is better despite the higher borrowing cost, and futures are best in tax-advantaged because the financing cost is lower and box-spreads aren't allowed anyways.
Post Reply