Leveraged ETF's
Discussion
Hoofy said:
It depends on how much you leverage. I don't know the details but if you're doing £10 a point and it drops 500 points for a few years then that's quite a small amount (-£5k). If you go a bit crazy and don't have that much to your name, but do £500 a point, could you sit with that paper loss?
Yup. The higher the leverage the more likely a margin call is. At low enough leverage a broker would be prepared to structure an OTC that within the conventional boundaries of the index wouldn’t trigger a margin call in the same way that we do on higher leverage traders. With respect, the normal process of buying a house may involve a loan but it isn't what I'd call "leverage". The primary reason for buying a house is to have/own your own home - not to make a profit.
In my mind "leverage" is the use of borrowed money with a view to "making a turn" in the short to medium term. You know, the classic, "If I borrow at 3% and invest in my business, which generates a 7% return, I'll be 4% ahead on the deal".
I wouldn't call borrowing money to buy a car/TV/fridge "leverage" either. I'd call it "borrowing to spend".
This IMO is the critical aspect of finance,
In my mind "leverage" is the use of borrowed money with a view to "making a turn" in the short to medium term. You know, the classic, "If I borrow at 3% and invest in my business, which generates a 7% return, I'll be 4% ahead on the deal".
I wouldn't call borrowing money to buy a car/TV/fridge "leverage" either. I'd call it "borrowing to spend".
This IMO is the critical aspect of finance,
- Borrowing to "invest" is fine.
- Borrowing to "spend" is lunacy.
DonkeyApple said:
Derek Chevalier said:
Bearing in mind the typical investor will be very, very uncomfortable with an unleveraged 100% global equities, accepting more volatility than this surely can't be a rational decision for the vast majority of people. For those with very aggressive objectives, maybe retiring later and/or on less and/or saving more (or whatever the objective is if not retirement) must surely be a better choice?
I agree. I would think that working for a few more years, saving more or retiring on less would be hard to argue against as the most prudent solution. But when you have a client who wants to invest a portion of their money into high risk what are the sort of options available? Typically investors are steered towards emerging markets but it would be interesting to consider how or whether the FTSE iShare with 10 or 20% leverage would compare as an alternative? If the two had identical volatility and comparable costs would the general stability of underlying blue chips come through?
It would be interesting to look at how something like TEM.L would compare to CUKX.L with say 10% leverage.
Even taking a simple global equity/bond split the return per unit of risk reduces as you move up the risk curve, so you'd need to bear this in mind even before you got to 100% global equity. Re taking concentration in emerging markets (if not happy with 100% global equity risk), you are potentially getting a better return (but also potentially accepting periods of underperformance vs global), enhanced risk adjusted returns debatable.
Anything based on the FTSE 100 will have a poor historical risk return vs global (which is why DFMs love benchmarking against it) so I'd much rather use the global as a benchmark - not sure if you can leverage this? As someone pointed out in a more recent thread, I think slippage becomes a concern in leveraged products e.g. 3x FTSE will not give 3x the upside of the FTSE in a rising market.
If this thread stays active into next week I'll dig some data out (it's too sunny today
)DonkeyApple said:
Derek Chevalier said:
Bearing in mind the typical investor will be very, very uncomfortable with an unleveraged 100% global equities, accepting more volatility than this surely can't be a rational decision for the vast majority of people. For those with very aggressive objectives, maybe retiring later and/or on less and/or saving more (or whatever the objective is if not retirement) must surely be a better choice?
I agree. I would think that working for a few more years, saving more or retiring on less would be hard to argue against as the most prudent solution. But when you have a client who wants to invest a portion of their money into high risk what are the sort of options available? Typically investors are steered towards emerging markets but it would be interesting to consider how or whether the FTSE iShare with 10 or 20% leverage would compare as an alternative? If the two had identical volatility and comparable costs would the general stability of underlying blue chips come through?
It would be interesting to look at how something like TEM.L would compare to CUKX.L with say 10% leverage.
Even taking a simple global equity/bond split the return per unit of risk reduces as you move up the risk curve, so you'd need to bear this in mind even before you got to 100% global equity. Re taking concentration in emerging markets (if not happy with 100% global equity risk), you are potentially getting a better return (but also potentially accepting periods of underperformance vs global), enhanced risk adjusted returns debatable.
Anything based on the FTSE 100 will have a poor historical risk return vs global (which is why DFMs love benchmarking against it) so I'd much rather use the global as a benchmark - not sure if you can leverage this? As someone pointed out in a more recent thread, I think slippage becomes a concern in leveraged products e.g. 3x FTSE will not give 3x the upside of the FTSE in a rising market.
If this thread stays active into next week I'll dig some data out (it's too sunny today
)FastNLoud said:
So you guys wouldn't go near the leveraged ETF's on Hargreaves Lansdown for example?
I think it’s important to know precisely what they are before seeking to use them as a means to meet investment objectives. Personally, I think the leverage at 2-3x is far too high for them to be investment tools other than for very short term purposes such as arbitrage or hedging but I think even then they will fall down because the spreads are too wide for any arb opportunities and the daily funding too high for any short term hedging.
Do Hargreaves publish the daily funding costs and the general trading costs? It would be interesting to try and make a comparison between one of these and just a vanilla spreadbet or CFD whichbmy gutnis telling me is a superior product bar exclusion from an ISA wrapper.
Derek Chevalier said:
(With caveat that it wouldn't a client of mine!)
Even taking a simple global equity/bond split the return per unit of risk reduces as you move up the risk curve, so you'd need to bear this in mind even before you got to 100% global equity. Re taking concentration in emerging markets (if not happy with 100% global equity risk), you are potentially getting a better return (but also potentially accepting periods of underperformance vs global), enhanced risk adjusted returns debatable.
Anything based on the FTSE 100 will have a poor historical risk return vs global (which is why DFMs love benchmarking against it) so I'd much rather use the global as a benchmark - not sure if you can leverage this? As someone pointed out in a more recent thread, I think slippage becomes a concern in leveraged products e.g. 3x FTSE will not give 3x the upside of the FTSE in a rising market.
If this thread stays active into next week I'll dig some data out (it's too sunny today)
Agreed. Next few days are looking too good. Even taking a simple global equity/bond split the return per unit of risk reduces as you move up the risk curve, so you'd need to bear this in mind even before you got to 100% global equity. Re taking concentration in emerging markets (if not happy with 100% global equity risk), you are potentially getting a better return (but also potentially accepting periods of underperformance vs global), enhanced risk adjusted returns debatable.
Anything based on the FTSE 100 will have a poor historical risk return vs global (which is why DFMs love benchmarking against it) so I'd much rather use the global as a benchmark - not sure if you can leverage this? As someone pointed out in a more recent thread, I think slippage becomes a concern in leveraged products e.g. 3x FTSE will not give 3x the upside of the FTSE in a rising market.
If this thread stays active into next week I'll dig some data out (it's too sunny today
)I can leverage anything that’s on exchange so let me know the global index you’re thinking of and an equivalent ETF and I can have a look on my side.
Derek Chevalier said:
Even taking a simple global equity/bond split the return per unit of risk reduces as you move up the risk curve, so you'd need to bear this in mind even before you got to 100% global equity.
Very interesting. What's the shape of that curve? (Yes, another question for "one day when it's raining"......)rockin said:
Very interesting. What's the shape of that curve? (Yes, another question for "one day when it's raining"......)
Don't know the answer to that question but this site is fascinating to play around with to see how allocations would have fared over timehttps://www.portfoliovisualizer.com/backtest-asset...
I've used I shares 2xs, financial and real estate funds.
Technically they are only 2 times for each day,
The funds hold mostly cash and use futures as a way of doubling the move in the resp index.
My target for each trade was 4 - 6%, I would set limit buys and sells usually before open as that was most active period when prices were most unpredictable. Shortest hold a few hours, longest 3 days.
I seldom made more than 10% because of my limit sells, but I would generally have five or six open positions on the same share.
But.....they are not really two times, more like 1.8 at most because of the spread, one also have to consider that the Market Makers are not idiots and they control the prices (sort of). You need a good feel for the market and some volatility, I don't currently use them.
You may want to look at a graph of a 2 x and its 2 x short from the same index and then overlay the index they represent to see if they are for you.
They are actually inefficient, but you can make decent money if the planets align
Technically they are only 2 times for each day,
The funds hold mostly cash and use futures as a way of doubling the move in the resp index.
My target for each trade was 4 - 6%, I would set limit buys and sells usually before open as that was most active period when prices were most unpredictable. Shortest hold a few hours, longest 3 days.
I seldom made more than 10% because of my limit sells, but I would generally have five or six open positions on the same share.
But.....they are not really two times, more like 1.8 at most because of the spread, one also have to consider that the Market Makers are not idiots and they control the prices (sort of). You need a good feel for the market and some volatility, I don't currently use them.
You may want to look at a graph of a 2 x and its 2 x short from the same index and then overlay the index they represent to see if they are for you.
They are actually inefficient, but you can make decent money if the planets align
Interesting discussion!
At the risk of teaching grandpa to suck eggs, don't forget that the majority of mature businesses are themselves well geared/leveraged. For the FTSE100, the median ratio of long-term debt to equity is currently around 60%. This varies with sector. Not surprisingly, utilities tend to be highly geared as they have a very stable revenue base and pricing power. Eg Severn Trent has £5.3bn long term debt against £4.7bn equity. At the other extreme, house builders look very lightly geared - perhaps reflecting the stress they went through after the financial crisis, eg Persimmon has nil long term debt.
I expect gearing levels are lower outside the FTSE100 but haven't checked, eg a start-up won't find it easy to borrow.
There's a lot of economic theory on firms' optimum capital structure but I doubt it's that relevant here. I just wouldn't want to be holding a leveraged position in over-leveraged businesses if (and it's a big if) recession strikes.
At the risk of teaching grandpa to suck eggs, don't forget that the majority of mature businesses are themselves well geared/leveraged. For the FTSE100, the median ratio of long-term debt to equity is currently around 60%. This varies with sector. Not surprisingly, utilities tend to be highly geared as they have a very stable revenue base and pricing power. Eg Severn Trent has £5.3bn long term debt against £4.7bn equity. At the other extreme, house builders look very lightly geared - perhaps reflecting the stress they went through after the financial crisis, eg Persimmon has nil long term debt.
I expect gearing levels are lower outside the FTSE100 but haven't checked, eg a start-up won't find it easy to borrow.
There's a lot of economic theory on firms' optimum capital structure but I doubt it's that relevant here. I just wouldn't want to be holding a leveraged position in over-leveraged businesses if (and it's a big if) recession strikes.
b
hstewie said:
hstewie said:rockin said:
Very interesting. What's the shape of that curve? (Yes, another question for "one day when it's raining"......)
Don't know the answer to that question but this site is fascinating to play around with to see how allocations would have fared over timehttps://www.portfoliovisualizer.com/backtest-asset...
I idly compared $10k in a Vanguard 500 Index Investor Fund over 20 years with no periodic adjustments and no rebalancing against 50% US Stock Market and 50% Long-Term Treasury and the results are exactly the same i.e. the 50/50 allocation beats the fund by $11.00 - each have a CAGR of 6.51%.
Remember that this is across two recessions (Dot Com Boom in 2001 and Sub-prime in 2008) and one strong bull (2009 onwards). The important point is sequence risk ('Beyond 4% Rule) i.e. when in deacummulation [drawdown], the 1st decade has an extremely strong correlation towards returns over the 30 year deacummulation period.
The best year for the Fund compared to 50/50%: 32.18% vs 18.80%. However, compare worst years: -37.02% vs -6.26%.
My original thinking was 'all-in' during retirement i.e. %100 [Global] equities. After 3/4 of the way through the book, and through a basic back-test, 50% [US] equities and 50% [US] Govt bonds provides almost the same result but with much less risk when in a deacummulation period.
Now, the future may not replicate the past - which is interesting if comparing global equities excl. US vs US equities pre and post 2008 - especially understanding prevailing market conditions pre and post 2008 [quantitative easing and Corporate US Debt levels].
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