Combined Leveraged And Non-Leveraged ETFs: Tactical Allocation
Summary
- Three portfolios: (1) non-leveraged (2) leveraged and (3) combined.
- Invest according to three market states: risk-on, risk-N and risk-off.
- Investment choices: Non-leveraged funds, leveraged funds, and risk-off funds.
- Simulation results produced with Portfolio Visualizer are in included in three PDF reports.
- This idea was discussed in more depth with members of my private investing community, Adaptive Momentum Investing. Learn More »
hadynyah
Investment Philosophy
My investing philosophy is to be fully invested in stocks during periods of market price uptrends (risk-on), and to switch to safe assets, namely Treasury bonds or cash, when markets are in deep price corrections (risk-off).
To determine the state of the market we compute the difference in total returns of the following four ETF pairs: (DBB, UUP), (XLI, XLU), (SLV, GLD) and (XLRE, XLV) over an evaluation period. The evaluation period is variable. It is a function of market volatility. Currently it is 79 trading days.
Decision Rules:
Risk-ON if three or four pairs have positive difference of their total returns over the evaluation period. Risk-N if two pairs have positive difference and two have negative difference. Risk-OFF if three or four pairs have negative difference of their total returns over the evaluation period.
Investment Choices
Non-leveraged funds: Top two ETFs from this list: QQQ, SPY, XLE, XLK, XRT, EFA.
Leveraged funds: Top two ETFs from this list: TQQQ, SPXL, ERX, RETL, EURL.
Risk-OFF funds: Top two ETFs from this list: BIL, SHV, IEI, IEF, TLT, DBC, UUP
Portfolios
We analyze the following three portfolios:
- NLEV – Non-Leveraged: during risk-ON and risk-N it invests in non-leveraged funds
- LEV – Leveraged: during risk-ON and risk-N it invests in leveraged funds
- LEV_C: Combined Leveraged and Non-leveraged – during risk-ON it invest in leveraged funds, during risk-N it invest in non-leveraged funds.
In this article, I compare the performance of NLEV, LEV and LEV_C portfolios over the time period from December 2007 to July 2023.
Simulation Results
The simulation results are shown in three Portfolio Visualizer reports: NLEV.pdf, LEV.pdf and LEV_C.pdf. Following is a brief description of the three portfolios.
- NLEV – invests in non-leveraged ETFs when the market is in risk-ON or risk-N state.
- LEV – invests in leveraged ETFs when the market is in risk-ON or risk-N state.
- LEV_C – invests in leveraged ETFs when the market is in risk-ON and in non-leveraged ETFs when the market is in risk-N state.
Here is a table that shows the summary performance of the three portfolios over the period from December 2007 to July 2023.
1/2016 - 7/17/23 | CAGR | stdev | maxDD | Sharpe R | Sortino R |
NLEV | 21.70% | 13.15% | -15.04% | 1.51 | 3.08 |
LEV | 55.96% | 38.89% | -37.60% | 1.32 | 3.05 |
LEV_C | 44.47% | 32.33% | -20.45% | 1.27 | 3.89 |
Detailed information about the performance of the portfolios is contained in the PV reports. Here, we present a brief interpretation of the results.
NLEV portfolio has lowest maxDD and highest Sharpe ratio.
LEV portfolio has the highest CAGR and the largest maxDD.
LEV_C is a lucky middle performance: it achieves twice the CAGR of NLEV while maxDD increases only by about a third.
Risk Warning
TQQQ, SPXL, RETL, ERX and EURL are leveraged funds. They may suffer value erosion and should only be used as tactical, short-term investment vehicles.
Here is a detailed message from the SEC on the risks inherent in leveraged ETFs.
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This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TQQQ, SPXL, BIL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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