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There are lots of ways to amplify your investment returns.
Leveraged ETFs are one of those ways, but they're often deeply misunderstood. Here's what I wish I knew the first time I bought them:
(thread)
Leveraged ETFs are one of those ways, but they're often deeply misunderstood. Here's what I wish I knew the first time I bought them:
(thread)
Leveraged ETFs most commonly provide a multiplier on the percentage returns of an index.
One example is $SPXL, the "Daily S&P 500 Bull 3x" ETF. Let's break that down the meaning of that name piece-by-piece.
One example is $SPXL, the "Daily S&P 500 Bull 3x" ETF. Let's break that down the meaning of that name piece-by-piece.
Daily →
It rebalances daily, and attempts to amplify the daily % returns of the underlying.
S&P 500 →
It amplifies the S&P 500 index.
Bull →
It moves with the index, as opposed to against it.
3x →
It amplifies the % returns of the index by 3x.
It rebalances daily, and attempts to amplify the daily % returns of the underlying.
S&P 500 →
It amplifies the S&P 500 index.
Bull →
It moves with the index, as opposed to against it.
3x →
It amplifies the % returns of the index by 3x.
So if $SPY goes up by 1% today, $SPXL should go up by 3%.
If $SPY goes down by 1% today, $SPXL should go up by 3%.
Simple enough, right?
If $SPY goes down by 1% today, $SPXL should go up by 3%.
Simple enough, right?
The complexity comes from the "Daily" component of $SPXL.
An unwitting buyer might assume that it's rebalanced like most other ETFs – quarterly. Bad assumption. The fact that $SPXL is rebalanced daily MASSIVELY impacts its behavior.
Let's see an example:
An unwitting buyer might assume that it's rebalanced like most other ETFs – quarterly. Bad assumption. The fact that $SPXL is rebalanced daily MASSIVELY impacts its behavior.
Let's see an example:
You start with $100 in $SPY.
On Day 1, $SPY goes down 10%, so your position is worth $90.
On Day 2, $SPY goes up 15%, leaving you with $103.50.
You gained 3.5% overall. Sweet!
What happens to $SPXL over those 2 days?
On Day 1, $SPY goes down 10%, so your position is worth $90.
On Day 2, $SPY goes up 15%, leaving you with $103.50.
You gained 3.5% overall. Sweet!
What happens to $SPXL over those 2 days?
On Day 1, $SPXL goes down 30% (3 x 10%), so your position is worth $70.
On Day 2, $SPXL goes up 45%, leaving you with $101.50.
You only gained 1.5% overall. Hardly 3x!
On Day 2, $SPXL goes up 45%, leaving you with $101.50.
You only gained 1.5% overall. Hardly 3x!
That's a toy example, but how does this play out in real life?
Here's a chart of $SPXL (orange) compared to $SPY since the market bottomed in mid-March 2020.
$SPXL has returned 267% since then, while $SPY has returned 60%. It performed almost 4.5x better than $SPY.
Explosive!
Here's a chart of $SPXL (orange) compared to $SPY since the market bottomed in mid-March 2020.
$SPXL has returned 267% since then, while $SPY has returned 60%. It performed almost 4.5x better than $SPY.
Explosive!
But when you zoom out to include the whole year, it's a different story.
This chart shows that $SPXL (orange) still hasn't been able to recover from the massive downward moves in February/March, and is down 11% on the year while $SPY (blue) is up 7%.
This chart shows that $SPXL (orange) still hasn't been able to recover from the massive downward moves in February/March, and is down 11% on the year while $SPY (blue) is up 7%.
These charts show how a down day in a given period makes it less likely that the leveraged ETF will yield 3x returns in that period. And a long string of up days can yield way more than 3x returns.
The promise of 3x amplification only applies within a given trading day.
The promise of 3x amplification only applies within a given trading day.
That's why investors aren't advised to hold leveraged ETFs for more than a day – get in and get out before the rebalancing!
Unless you predicted a 5-month, nearly-straight-line bull run during through an economic shutdown...
In that case, buy & hold, straight to the moon.
Unless you predicted a 5-month, nearly-straight-line bull run during through an economic shutdown...
In that case, buy & hold, straight to the moon.
