Strategy: 3x leveraged Universal Investment Strategy

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Strategy: 3x leveraged Universal Investment Strategy 2017-03-03T15:29:53+00:00

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  • Alexander Horn
    Keymaster
    Post count: 383

    Support thread for this strategy

  • Ben Andersen
    Participant
    Post count: 3

    Thank you. I am trying to figure out what the acceptable costs would be if wanted to do this strategy by shorting the inverse 3x ETFs like TMV and SPXS.
    With my current (US) broker there is a “hard to borrow” fee of 2%/year – and it looks like the margin interest rate is then on top. Any guide lines as to when the cost outweights the benefits shorting inverse 3x ETFs?
    Regards!

  • rfm12
    Participant
    Post count: 6

    I’d be interested to know about this too, if someone there could fill us in.

    Thanks.

  • Alexander Horn
    Keymaster
    Post count: 383

    We’ll dive more into borrowing costs in Part II, when we look at shorting the -3x ETF. For the time being, also have a look at the cost at IB: http://bit.ly/1C9BjRc

    Guess you have seen the discussion at seekingalpha, also there quite some comments on that topic: http://seekingalpha.com/article/3050016-hell-on-fire-the-3x-leveraged-universal-investment-strategy-part-i#comment-50996466

  • Ronald Brice
    Participant
    Post count: 8

    Hello,

    I invested in the UIS-3x strategy for the first time this morning (May 1).

    I bought SPXL (80% allocation) and TMF (20% allocation) at the market open. Here are my trades (sorry for the bad formatting):

    Symbol Date Open Close Bought At
    ——————————————————–
    SPXL 1-May $92.03 $93.57 $92.05
    SPXL 30-Apr $92.69 $90.76 N/A
    ——————————————————–
    TMF 1-May $83.12 $81.75 $83.12
    TMF 30-Apr $83.22 $85.18 N/A

    When the market closed today (May 1), I ended up with a gain in SPXL of 1.65% and a loss in TMF of -1.65%. Overall, due to the Allocations below, I gained 1%. Pretty good.

    Now looking at the snapshot of the Return Tables below, I certainly did not experience the percentages in the “Symbol Ret” column.

    Entry Exit Symbol Allocation Symbol Ret Strategy Ret
    4/30/15 5/1/15 SPXL 80 3.1 1.67
    4/30/15 5/1/15 TMF 20 -4.03 1.67

    Of course, had I invested in UIS-3x prior to May 1, I would have received the “Symbol Ret” percentages. But I believe we are told to invest in strategies on either the first trading day we receive the signal or on the second trading day, and to invest at the market open (or market close or with a limit order throughout the day). But in the case above, it is very misleading since I was not invested prior to May 1, yet the “Symbol Ret” column assumes that I was.

    Can I please get your feedback on this topic?

    Thank you,
    Ron

  • Frank Grossmann
    Moderator
    Post count: 157

    At the beginning of a strategy investment it is clear that it makes a difference when you invest. However these are long term strategies, and after a few month it makes not much a difference anymore. Sure one month you probably have a less good trade than our end of month rebalancing, but there are about the same amount of month where you get a better trade. After a number of trades the difference is about zero. The difference of trades for such a short period is more random noise. If it would not be random, then we would instantly made a nice strategy out of it.
    The only real difference which will reduce your performance slightly compared to our published performance is that we do not calculate spreads and commissions. These are different from broker to broker, but the spread for SPY/TLT and even SPXL/TMF is very small, and commissions are also small seen that most of the time you rebalance only 10% of your portfolio. All together spread and commissions are less than 1% for the whole year with a good discount broker.

  • rikder
    Participant
    Post count: 20

    I am a new subscriber and I had the exact same question as Ronald. Hopefully this was a particularly bad month for the rotation because the allocation changed by such a large percent (50/50 to 80/20 in UIS unleveraged) coincidentally with a large move in the ETFs between the signal and execution. Frank, regarding your answer, I wonder why you don’t just use the opening price for the first day of the month on the website? If it doesn’t affect the results much overall, it would certainly make the percentages line up more closely to actual execution prices month to month. I’m sure as you say, long term it makes little difference but it would help me to see my percentages more closely match those on the signals pages month to month. Just out of curiosity, do you personally execute your trades at the close on the last day of the month or after the open on the 1st day? Thanks.

    • Frank Grossmann
      Moderator
      Post count: 157

      There are several reasons not to use opening prices. The most important is that for the ETFs we only get adjusted closing prices from the data provider. So all our calculations are based on closing prices and our subscribers can backtest and verify the results. The second reason is that using adjusted closing prices is a sort of industry standard. Websites like EtfReplay.com which let you backtest simple rotation strategies use the same approach. The third reason is that using the end of day closing price, I can calculate the new allocation just after the last trading day of the month, and this way you know the allocation before the market opens the next day. Also I do not recommend to trade at open, because this would probably result in quite a big slippage if all subscribers would do so. It is better to have the trades distributed over the first 2 days. So, anyway every investor will get slightly different prices.

  • Ronald Brice
    Participant
    Post count: 8

    Frank, on your website (Strategies –> How to invest in our strategies), it says:

    “Once you subscribe to our strategies, we will send you monthly (or more often depending on the strategy) a newsletter with the buy and sell signals of the strategies you subscribed to. We recommend you to execute these orders at your broker the next morning; this should be doable online within 15-20 minutes. Submitting your order some 2-3 days later is also OK for the strategies we use, you might only see the “turn of the month effect” to be reduced and “out-of-sync” with our reports.”

    I also searched the forums for references regarding when trades should be executed. One post said trade at the open, one said trade during the first two days, one said trade at the open on the 2nd day, etc. The text above from the website says to trade at the market open after receiving the signals.

    What is the final recommendation? If the recommendation is to trade anytime during the first two days (after receiving the signals), but always at the same time every month, then ok.

    Does your trading recommendation apply to every single strategy?

    Ron

    • Ronald Brice
      Participant
      Post count: 8

      Could I please get a reply to the questions above?

      Thanks,
      Ron

  • Vangelis
    Moderator
    Post count: 154

    Dear Ron,

    There is no edge in picking a day other than being close to reported results. My recommendation for the BUG strategies has been to trade on the second day of the month @ the open if you have IB account or manually during the day, preferably below VWAP, if not. If you are dealing with less liquid ETFs, trade towards the close of the day.
    Keep in mind, these are monthly strategies. If you pick a random day in the month, sometimes you will do better sometimes worst than the reported strategy. If there was an “edge” then that would be a strategy in itself. End-of-month trading used to have an edge, not anymore.

  • Patrick
    Participant
    Post count: 11

    When do you plan to provide performance and/or signals for 3x inverse ETFs (TMV and SPXU)?

  • Alexander Horn
    Keymaster
    Post count: 383

    Patrick,

    this will take some more weeks, we´re releasing another strategy in between.

    Also I´m still struggling to get reliable historical borrowing costs and availability data.

  • gselsidi
    Participant
    Post count: 4

    Hi guys,

    This is a general question about the UIS, leveraged or none, it goes off on the notion of bonds and equities having a negative correlation, what if in the future this correlation breaks down, wouldn’t this break the whole strategy?

    How does a strategy where you go short equities through either a regular short of the long SPY fund, or through a bear ETF perform? This would remove the uncertainty that if these 2 instruments lose their negative correlation, the strategy can still work.

    Thanks

  • Chee Wee
    Participant
    Post count: 1

    Hi, is there any reason why SPXL was used instead of UPRO (which has a higher volume)?

    • Deshan Woods
      Participant
      Post count: 20

      I’m using TQQQ in place of SPXL…I just like the Q’s better.

  • Raymond Capozzi
    Participant
    Post count: 3

    I too wonder why SPXL over UPRO. The volume on UPRO is way better than SPXL. That should reduce spread. But what about cost? I don’t know.

    I prefer the UPRO index over TQQQ as SP500 is more diversify. I hate to risk capital on so few companies that occupy QQQ. QQQ is 70% made from AMZN, GOOG, APPL, and Facebook (is that really a company) since it is market cap weighted index. I really like the idea of QQQE. I do not know of a 3X version of that index. But I like the idea of back testing even more. LogicInvest does those things. And they do it very well.

  • Nikesh Simha
    Participant
    Post count: 5

    Will using a MA crossover as a cash filter help this strategy? Is there any reason not to do this? Will Using a filter for going to cash diminish the returns significantly? I would imagine it would certainly decrease drawdowns. Your thoughts are greatly appreciated.
    Thanks You.
    -Nikesh

  • Vangelis
    Moderator
    Post count: 154

    Historically, it has been better not to use a MA filter since Treasuries worked better than go-to-cash. In other words, from a backtesting point of view, it has been best to be always invested. The BUG does use the mechanism you mentioned and the leverage version is currently all in cash, because of that.
    Keep in mind that UIS 3x is not the best choice for very volatile markets since both 3x components suffer losses. There are other more conservative choices. If you must trade the 3x, it is better to short the reverse 3x’s, or if you cannot, go with the straight UIS.

  • yura socolov
    Participant
    Post count: 1

    I was wondering, since essentially we are doing buy and hold on these securities, albeit with rebalancing, would adding short term covered call writing improve the results and soften the risk a little? Is there a reason not to do it?

  • Patrick
    Participant
    Post count: 2

    Hi,

    It is a good strategy to apply the same ratio as the maximum yield strategy for the 3x leveraged Universal Investment strategy (ex: 40% SPXL and 60% TMF if maximum yield strategy is 40% ZIV and 60% TMF), such as for the beginning of the month and for the middle of the month.

    Thanks

    Patrick

  • Frank Grossmann
    Moderator
    Post count: 157

    The 3x leveraged SP500 ETF is moving very similar to ZIV, so many times also the ratios are the same. If however the VIX Futures go again in steep contango so that ZIV will gain again from rolling the Futures, then the ratio can be quite different.

  • Greg Gaines
    Participant
    Post count: 1

    I am a bit confused by the posted 2009 Annual Performance Vs Spy return of 174%. When I examine the monthly returns for 2009 as given in the section below the Annual returns. I calculate a 2009 return just barely over 20%. Can you clarify please?

    Thanks,
    Greg

  • Vangelis
    Moderator
    Post count: 154

    Hello Greg,
    The small yearly bar chart was pulling the wrong data. It should show the correct values now.

  • Deshan Woods
    Participant
    Post count: 20

    Just wanted everyone to know that the 3x leveraged version strategy page hasn’t been loading over past week.

    • Vangelis
      Moderator
      Post count: 154

      Thank you for the feedback. It should be loading proprerly now.

  • Johan Holmgren
    Participant
    Post count: 1

    Hi what is the difference in return since inception (around 7000%) and max return on the chart (around 5000%)?

    Thanks,
    Johan

  • reuptake
    Participant
    Post count: 97

    I have a question that maybe bit stupid, but I have to ask: what is the point of using non-leveraged UI strategy, when one can use leveraged with 1/3 of funds?

  • Vangelis
    Moderator
    Post count: 154

    Depending on volatility, 3x Etfs experience decay and in the long run will not provide 3x the returns of the simple ETFs. UIS with 300K allocated will, most of the time, perform a bit better than 3xUIS with $100K due to 3x ETF decay. There is a lot of literature on 3x ETF decay available on the internet.

  • Supal Patel
    Participant
    Post count: 3

    In the monthly strategy email it says universal investment strategy can be used with different scenarios like “There are many kinds of option trades possible. Most of them will be selling ATM or OTM SPY and TLT strangles.”

    My questions:

    1) Can we combine Logical Investment strategies with some option premium selling strategies? Have you performed any back test to see what kind of option selling strategies can be applied?

    2) Do you suggest selling covered calls or selling ATM put options for NASDAQ100 or gold currency or UIS?

    Appreciate some guidance on this.

    • Frank Grossmann
      Moderator
      Post count: 157

      Option strategies are very hard to backtest. Data is difficult to get and even if you backtest, spreads can be much different doing real trades.
      The only thing I do in sideways markets is to sell slightly OTM SPY calls and sell slightly OTM TLT put. At the moment with SPY near all time high and TLT really low, SPY will rather correct to the downside and TLT probably to the upside. This way you can generate income during sideways markets.
      Gold or currencies are too impredictable for me. You can never know which side they go.

  • Deshan Woods
    Participant
    Post count: 20

    According to a CNBC article published today:

    Legendary investor Bill Miller is killing it again, thanks to a clever bet on Apple

    The legendary portfolio manager’s Miller Opportunity Trust mutual fund is up a gaudy 13.9 percent this year, easily beating the S&P 500’s return of 7.8 percent including dividends, according to Morningstar. That puts the $1.4 billion security in the rating firm’s top 1 percentile in its category.

    3 LI strategies are higher than that right now. Welcome to the very top.

    • Alexander Horn
      Keymaster
      Post count: 383

      Deshan, thanks for the note, very much appreciated. We´re working hard to keep us – and your portfolio – at the top!

  • R D HATHCOCK
    Participant
    Post count: 13

    I am curious to know if the SPXS-TMV strategy would occasionally be selected over SPXL-TMF. Looking at the quant trader,
    it seems to perform about the same overall.

    If a longer trend develops towards a gradual climb in Fed rates, what are your thoughts on TMV being a better overall performer–as TMF was during 30+ years of falling rates?

    • Alexander Horn
      Keymaster
      Post count: 383

      Hi RD, just working on an article about SPXS-TMV, will be out next two weks. You´re right, no big difference between going long SPXL/TMF or shorting the short SPXS/TMV pair, some 6-8 points p.a. from harvesting the roll-losses of the leveraged shorts. Interesting enough, these vary a lot from year to year, so it´s not a “guaranteed” win to short.

      Be careful when comparing the two, we´re long TMF or shorting the short TMV, so both are at the end long positions and would suffer in a similar manner from a continued hike – no difference there.

    • Doug
      Post count: 0

      Thanks. However, I am comparing LONG SPXS-TMV, not shorting them. The thought is that there is now an upward bias on long term treasury bonds that likely will last. All of the historical data are generated after interest rates peaked in 1981. They have been in an overall decline until last year, when the FED first raised them.

      I find that TMF is quite a high risk item in this environment. I have build a strategy that goes between either the SPXL-TMF or SPXS-TMV. Right now, it is selecting the SHORT version. It has since the election of 2016.

      However, I am not an expert and may well be missing something–so before I apply that strategy, I would like your advice/comments on this strategy.

    • Alexander Horn
      Keymaster
      Post count: 383

      Hi Doug, when going long TMV, e.g. short bonds there are two things to consider:
      – Bonds have historically a negative correlation with equities, and the historically have peaked in crisis times, e.g. when equities fall. Shorting TMV will further add to the downswings of the rest of your equity portfolio, and you loose the hedge we´re normally are looking for.
      – In addition you´ll loose from the daily roll costs of these leveraged ETF, which is roughly a 6-8% p.a. Same as TMF, but there the correlation plays in your favour.

      Combining a long SPXL/TMF with a long SPXS/TMV might work if you choose a shorter look-back, probably in the 20 days range, to catch the short term equity moves as a mean reversion. QuantTrader will tell you, and please share your findings with the audience.

      I just doubt whether long term it´s worth loosing the hedging properties of a long bonds position to benefit from the anticipated rate hike- which has been moderate compared to the expectation of the dooms-day sayers.

  • Greg
    Post count: 0

    As of 07/06/2017 the 3x universal strategy shows positive return since its entry on 6/30/2017, but both SPXL and TMF are down for this period. Question: Had the strategy switched its allocation to different symbols?

  • rogerkjames
    Participant
    Post count: 1

    I noticed that today (13 December) SPXL opened around 3% lower than it’s close yesterday despite the S&P500 opening higher and rival UPRO also opening slightly higher.
    SPXL does not give a dividend so it can’t have gone ex-div. Any idea why this sudden fall?
    Perhaps you should use UPRO instead?

    • R D HATHCOCK
      Participant
      Post count: 13

      I have a lot in this strategy and found the market action unnerving until I figured out what was happening. Pls see below, there is a dividend being issued.

      1 user thanked author for this post.
  • James Stahl
    Participant
    Post count: 2

    Hey guys. Any idea of what’s happening with SPXL today? Seems to be a spike in volume and huge divergence vs. SPY.

  • R D HATHCOCK
    Participant
    Post count: 13

    A Dividend being issued onn 12/20!

    Dividend Declaration Date
    Dec-12-2017
    Dividend Ex Date
    Dec-13-2017
    Dividend Record Date
    Dec-14-2017
    Dividend Pay Date
    Dec-20-2017
    Dividend Amount Current
    $ 1.603590
    Dividend Amount Previous
    $ 0.008517

    1 user thanked author for this post.
  • Deshan Woods
    Participant
    Post count: 20

    I’ve been a subscriber to this strategy since April 2015 and switched from the MYRS which I had been a subscriber since January 2014. I switched because I wanted the most aggressive strategy available. It’s paid off, even though the MYRS has outperformed this one YTD, my actual YTD is 62% because I use TQQQ in place of SPXL. I take on that risk on my own but believe long term that it is better with Top 100 Tech.

    I created a detailed excel file that tracks daily quotes and shows up-to-date necessary rebalance percentages so I dont have to do the math. It’s wonderful. It also shows me one week performance, month to date, one month, 3 month, 6 month, 1 year, 2 year and YTD. It also compares with SP500.

    I only rebalance if there is more than a 5% difference from monthly allocations.

    Using the tools and strategies from LI since the beginning of 2014, my actual CAGR is 40% as of today and has fluctuated between 35 and 40 percent all year. That equates to a gain of 160% since Jan 14. And that includes my dumb plays at various times too when I made some bad picks at the wrong times. It also includes that fateful Monday morning in late August 2015, a day I’ll never forget, when I saw a loss of 45% because I forgot to follow some rules.

    I’ll be retired next month at the age of 44 and will draw a small monthly pension. Thanks to LI, I’ve paid for my house and have accumulated a balance where I’m considering shaving each month’s gain and reverting back to a set balance each month to offset the difference in pay to help maintain living standards. It’s a different approach than what I’ve done in the past and part of my psychology only wants to let my account roll with the flow, but at the same time, shave some money and enjoy it. Oh the conflict.

    Any drawbacks to the “shave the monthly” profit plan? I know there will be months where you’ll have to wait because of drawbacks, but some of those monthly gains are hefty enough to carry you for long periods of time on a comfy budget plan.

    1 user thanked author for this post.
  • Mark Faust
    Participant
    Post count: 40

    Nice job Deshan!! I wish I would have found LI during my earlier years where I could have taken the risks you did….Would have been nice to have been retired by now….As it is, I will have to wait about 4 more years(52) until I can officially relax.
    I tried creating a spreadsheet something akin to yours…I had limited success so I ended up staying with just a basic version.
    I wonder what the difference in Std Dev is between using SPXL and TQQQ is in the “3X” strategy…..
    I assume you have a nominal portfolio with LI and that the 3X strategy is just a small piece??? I currently employ 10% each to MYRS and 3X UIS….i might look into the TQQQ though..
    thanks
    Bama

    ……I’ll be retired next month at the age of 44 and will draw a small monthly pension. Thanks to LI, I’ve paid for my house and have accumulated a balance where I’m considering shaving each month’s gain and reverting back to a set balance each month to offset the difference in pay to help maintain living standards. It’s a different approach than what I’ve done in the past and part of my psychology only wants to let my account roll with the flow, but at the same time, shave some money and enjoy it. Oh the conflict.
    Any drawbacks to the “shave the monthly” profit plan? I know there will be months where you’ll have to wait because of drawbacks, but some of those monthly gains are hefty enough to carry you for long periods of time on a comfy budget plan.

    • R D HATHCOCK
      Participant
      Post count: 13

      I am also using a group consisting of UDOW, TQQQ and SPXL, and having the software nominate what is invested. I require 10% minimum in each of the 3, and hedge with TMF using the structure (lookback, etc.) as UIS3X.

      From Morningstar the rough % composition of the unleveraged ETF’s is:
      Item – QQQ – SPY – DIA
      Fin. – 1 – 17 – 20
      Ind. – 4 – 11 – 23
      Tech. – 58 – 21 – 14
      #1 Hdlg AAPL{12) AAPL(4) BA(8)

      Does anyone have any thoughts on this?

  • Deshan Woods
    Participant
    Post count: 20

    Nice job Deshan!! I wish I would have found LI during my earlier years where I could have taken the risks you did….Would have been nice to have been retired by now….As it is, I will have to wait about 4 more years(52) until I can officially relax. I tried creating a spreadsheet something akin to yours…I had limited success so I ended up staying with just a basic version. I wonder what the difference in Std Dev is between using SPXL and TQQQ is in the “3X” strategy….. I assume you have a nominal portfolio with LI and that the 3X strategy is just a small piece??? I currently employ 10% each to MYRS and 3X UIS….i might look into the TQQQ though.. thanks Bama

    I’m fully invested in the 3x strategy. I’ve already taken out my initial investment and am purely riding on the profits. With my pension and low debt, I figure I can take the risks. One thing I’ve learned is that this strategy has beaten everything else I can find except for some XIV/VXX volatility strategies that cost way more to subscribe to and basically alternate between the two. Over the past 2 years, those strategies have really outperformed, but I feel more comfortable here with LI and the wisdom of the team.

    When compared to my mutual fund investing since the early 90s, no comparison. I’ve made more in past 3 years than my whole investment journey 20 years prior. That’s frustrating. Can’t get that time back and to know I paid all those fees to underperform the market.

    I have a long term goal and plan to stay faithfully focused to the emotion free monthly rebalance indicators.

  • Deshan Woods
    Participant
    Post count: 20

    I am also using a group consisting of UDOW, TQQQ and SPXL, and having the software nominate what is invested. I require 10% minimum in each of the 3, and hedge with TMF using the structure (lookback, etc.) as UIS3X.
    From Morningstar the rough % composition of the unleveraged ETF’s is: Item – QQQ – SPY – DIA Fin. – 1 – 17 – 20 Ind. – 4 – 11 – 23 Tech. – 58 – 21 – 14 #1 Hdlg AAPL{12) AAPL(4) BA(8)
    Does anyone have any thoughts on this?

    Looks like you have all three working for you and UDOW has surprisingly outperformed tech recently. I had a 50 50 spilt between SPXL and TQQQ for awhile but just TQQQ right now.

  • StefanM
    Participant
    Post count: 11

    Hi LI team,

    In this month’s (March 2018) Investment Outlook, it states “We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels. Leveraged ETFs are ‘path dependent’ and may not perform as well in volatile sideways markets.”

    If we are to rotate out of 3xUIS (and into 1xUIS), can you please kindly confirm how you would determine when it is recommended to re-enter into 3xUIS and that the subscriber community would be informed of that change in the volatility environment.

    Additionally, it may be helpful to remodel the 3xUIS strategy in QT to identify the impact of moving between 3xUIS and 1xUIS at various volatility levels.

    Thanks.

    1 user thanked author for this post.
  • Deshan Woods
    Participant
    Post count: 20

    Hi LI team,
    In this month’s (March 2018) Investment Outlook, it states “We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels. Leveraged ETFs are ‘path dependent’ and may not perform as well in volatile sideways markets.”
    If we are to rotate out of 3xUIS (and into 1xUIS), can you please kindly confirm how you would determine when it is recommended to re-enter into 3xUIS and that the subscriber community would be informed of that change in the volatility environment.
    Additionally, it may be helpful to remodel the 3xUIS strategy in QT to identify the impact of moving between 3xUIS and 1xUIS at various volatility levels.
    Thanks.

    I’m scratching my head over this too. After all, isn’t this supposed to be emotion free investing using solid backtested strategies through various timeframes and market conditions?

    I understand that leveraged ETFs have a decay about them based on the article in the newsletter, but isn’t the point of rebalancing monthly supposed to curb that fear?

    Fearful or short term investors shouldn’t use this strategy, but I’m not fearful nor short term. I’ll take on the risk, that’s why I chose this one. I want the opportunity to beat the experts and the market as a whole which many say can’t be done.

    When I look back at past results, I see periods where the strategy shifted in time to avoid long term losses for the most part. No one can guarantee the future, but are you all afraid of this strategy going forward? I’m getting confused.

    4 users thanked author for this post.
    • Vangelis
      Moderator
      Post count: 154

      I guess the comment was vague and not worded correctly so let me try to clarify. This is not about wether the UIS or 3x UIS strategy will continue to perform as expected. Neither does it mean that one should rotate from one to the other. It has to do with which version tends to be more efficient at certain environments because of how leveraged ETFs work.

      Let’s take an example: Let’s say SPY is at a theoretical price of 100, SPXL (3x long) at a price of 100 and SPXS (3x short) is at a price of 100 . After fluctuating up and down, 1 month later SPY ends up back at 100. For reasons I will not get into here, SPXL will end up at around 97 (due to ‘tracking error’) and SPXS will end up around 95. The divergence is a function of how volatile (larger ups and downs) the moves are, the leverage of the ETFs (2x or 3x) and whether the leveraged ETF is an inverse one (bigger divergence for inverse). So if one is expecting a flat and volatile market and has the funds and access to short leveraged ETFs, the preference would be:
      a. Implement UIS by shorting SPXS and TMV and gain slightly from the tracking error (minus borrowing costs)
      b. Long UIS.
      c. Long 3x UIS (loose from the tracking error).

      The opposite happens when the market goes straight up (or down). If SPY ended up at 110 and every day was an up day (no ups and down) SPXL would end up at 140+ (ie gain of more than 3x the underlying). Th opposite is true also. If SPY were to ‘crash’ in a straight line, SPXL would crash more than 3x times.

      So 3xUIS is less efficient in a flat or falling market.

      This does not mean you would ‘rotate’ from one strategy to another. It just means that if you have enough funds and expect a correction or a flat market, it may be better to stay with UIS than use the 3x. Again, it is a minor comment. Normally the choice between the three version comes down to how much money is available to commit (ie 10,000 vs 500,000) and whether there is access to short 3x ETFs with cheap borrowing cost. I trade the inverse 3x’s, Frank enhances further by using options 🙂

      The bottom line is that UIS is a strategy that has worked in the past and hopefully will continue to do so. Whether you trade using 3x ETFs, shorting inverse ETFs or selling puts may bring some extra returns provided you have the time and energy to deal with these minor tweaks.

      2 users thanked author for this post.
  • Invest
    Participant
    Post count: 3

    I´m a new subscriber i´m investing since some time but this is a little confusing one of the first thinks you learn is to stick to your strategy in thick and thin, or not? The graveyard low volatility level could also be over who knows for sure.

  • Deshan Woods
    Participant
    Post count: 20

    I guess the comment was vague and not worded correctly so let me try to clarify. This is not about wether the UIS or 3x UIS strategy will continue to perform as expected. Neither does it mean that one should rotate from one to the other. It has to do with which version tends to be more efficient at certain environments because of how leveraged ETFs work.

    Let’s take an example: Let’s say SPY is at a theoretical price of 100, SPXL (3x long) at a price of 100 and SPXS (3x short) is at a price of 100 . After fluctuating up and down, 1 month later SPY ends up back at 100. For reasons I will not get into here, SPXL will end up at around 97 (due to ‘tracking error’) and SPXS will end up around 95. The divergence is a function of how volatile (larger ups and downs) the moves are, the leverage of the ETFs (2x or 3x) and whether the leveraged ETF is an inverse one (bigger divergence for inverse). So if one is expecting a flat and volatile market and has the funds and access to short leveraged ETFs, the preference would be:
    a. Implement UIS by shorting SPXS and TMV and gain slightly from the tracking error (minus borrowing costs)
    b. Long UIS.
    c. Long 3x UIS (loose from the tracking error).

    The opposite happens when the market goes straight up (or down). If SPY ended up at 110 and every day was an up day (no ups and down) SPXL would end up at 140+ (ie gain of more than 3x the underlying). Th opposite is true also. If SPY were to ‘crash’ in a straight line, SPXL would crash more than 3x times.

    So 3xUIS is less efficient in a flat or falling market.

    This does not mean you would ‘rotate’ from one strategy to another. It just means that if you have enough funds and expect a correction or a flat market, it may be better to stay with UIS than use the 3x. Again, it is a minor comment. Normally the choice between the three version comes down to how much money is available to commit (ie 10,000 vs 500,000) and whether there is access to short 3x ETFs with cheap borrowing cost. I trade the inverse 3x’s, Frank enhances further by using options 🙂

    The bottom line is that UIS is a strategy that has worked in the past and hopefully will continue to do so. Whether you trade using 3x ETFs, shorting inverse ETFs or selling puts may bring some extra returns provided you have the time and energy to deal with these minor tweaks.

    Thanks for the clarification. It just seems that there could also be a signal to go to cash as well, like 20% xyz and 30% xyz 50% cash during periods described above but I remember Frank always saying cash isn’t a good investment.

    I also noticed that the #1 ranking ETF for the month was excluded from this month rebalance. Was this a mistake or did I read that wrong?

    Thanks for all you guys do. I really mean that.

  • StefanM
    Participant
    Post count: 11

    Dear Vangelis

    Thank you for your reply.

    Let me put my comment another way – having received the LI Investment Outlook last Thursday 1st March 2018, which stated ‘We would also like to remind subscribers that we do not recommend using the 3x leveraged strategies (ie, 3x UIS) while volatility sits at higher levels’, I took it to mean that the LI team have discretionarily overridden the 3xUIS for very good reasons (the basis of such reasons were not explicitly stated) and as the Investment Outlook was silent on how to action or interpret such a recommendation, I took it to mean that any investment in 3xUIS should be closed and rotated into 1xUIS. I assumed the above Investment Outlook comment was borne from the LI team’s significant prior investing experience (being greater than mine).

    I duly sold my 3xUIS investment and realised a loss.

    I am concerned that the LI team can make such a strong comment such as appearing to recommend the overriding of a strategy and not expect subscribers to take some sort of immediate action in order to follow this recommendation. I feel that you are attempting to backtrack on the Investment Outlook commentary and not addressing the concerns raised in my initial comment above.

    To that end, I would therefore be grateful if you would please kindly answer the following questions (some of which are from my previous post):

    • How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?
    • That the subscriber community would be informed of that change/improvement in the volatility environment.
    • As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.
    • I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    I subscribed in January 2018 and placed an investment using the 3xUIS strategy, probably at worst time.

    I have not yet reinvested in 1xUIS (or 3x UIS as you seem to suggest that its still valid) as yet, as my confidence in the LI position on this strategy is somewhat shaken. Addressing the above questions will go some way to restoring my confidence.

    Separately, prior to investing into 3xUIS, I researched the downside of leveraged ETFs in range-trading and downward markets. Indeed, the LI Investment Outlook contained a link re-emphasising leveraged ETF risks.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I would appreciate a point by point reply to the above questions.

    Thank you.

    • Vangelis
      Moderator
      Post count: 154

      Dear Stefan,

      We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

      How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

      You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

      That the subscriber community would be informed of that change/improvement in the volatility environment.

      We can post/email when this happens.

      As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

      This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

      I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

      We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

      Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

      I assume you mean this:
      “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

      This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

      2 users thanked author for this post.
    • StefanM
      Participant
      Post count: 11

      Dear Vangelis, thank you for your helpful reply, I appreciate it.

  • Deshan Woods
    Participant
    Post count: 20

    Dear Stefan,

    We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

    How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

    You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

    That the subscriber community would be informed of that change/improvement in the volatility environment.

    We can post/email when this happens.

    As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

    This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

    I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I assume you mean this:
    “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

    This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

    Thanks for clarifying. I just plan to stay true to the blue line express signals (3x UIS), rebalance and press on. Its done me well since 2014 and nothing has changed that. I expect bumps and bruises along the way and I have a 10 year time horizon and can take on these risks.

    Even when one enters at worst possible time, the strategy always seems to adapt and make rebounds. I will admit that the maximum yield strategy is looking good for entry now.

    1 user thanked author for this post.
  • Deshan Woods
    Participant
    Post count: 20

    Dear Stefan,

    We usually work with the assumption that all strategies are available to our subscribers. This is why we made such a recommendation. Obviously this is wrong and we apologise.

    How you would determine when it is recommended to re-enter into 3xUIS? Is it based on VIX having held a certain level for a certain period of time?

    You can re-enter when the VIX future’s term structure is back to normal, ie when the curve at vixcentral.com slopes upwards and it is time to rebalance.

    That the subscriber community would be informed of that change/improvement in the volatility environment.

    We can post/email when this happens.

    As I took the LI Investment Outlook comment as a discretionary recommendation to exit 3xUIS, can I please recommend that the LI team model in QT returns based on rotating out of 3xUIS and into 1xUIS.

    This would confuse a new subscriber 1 year from now. They would be looking at the UIS 3x chart and history and suddenly see a different allocation, using different ETFs. If the market was to crash tomorrow, they would look back and be sure we are somehow cheating. The forum, the newsletters and both UIS and 3x UIS signals are available online so that everyone can research and track what happened.

    I would also recommend that LI make it very clear when apparently discretionarily overriding a strategy and make explicit the basis of the reason for this override and when LI recommend re-entering the strategy.

    We will do that. If we override, we will be clear about it and write it in the signals post or via private email. Not in the newsletter which is opinion and published to the general public.

    Furthermore, we had a February recommendation to invest in Gold which is no longer in the March recommendation – can you please confirm why this changed?

    I assume you mean this:
    “Our strategies have been adapted, starting this February, to include gold in our new hedging mechanism. Gold is a well respected safe heaven asset. It performs well in inflation regimes and can be a “go-to” safety asset for institutional investors if stocks and bond fail. You can read more about this major update in Frank’s article.”

    This is not a recommendation. We adapt our strategies once every few years to keep up with market changes. We added Gold as an extra hedge to our strategies. The strategy algo may (or may not) allocate to gold depending on the state of the market.

    Thanks for clarifying. I just plan to stay true to the blue line express signals (3x UIS), rebalance and press on. Its done me well since 2014 and nothing has changed that. I expect bumps and bruises along the way and I have a 10 year time horizon and can take on these risks.

    Even when one enters at worst possible time, the strategy always seems to adapt and make rebounds. I will admit that the maximum yield strategy is looking good for entry now.

    While we cannot ever know for sure the future, following the strategy signal paid off for March adding another 3% to my portfolio for the month. Had I not switched, I would have seen nearly 5% loss.

    Even with FED raising interest rates late into month, the 10yr rate, which everyone on TV predicted would rise above 2.9% and possibly take out 3% soon after, never occurred. Quite the opposite happened.

    It’s nerve racking to hold big positions in TMF when everyone is telling you that interest rates will rise. Since TMF has to fall lower under that scenario, you start second guessing everything. The fact is that no one knows anything for sure. Even with the FED .25% raise, the rate which briefly rose above 2.9%, didn’t hold and has now fallen below 2.75%.

    I know TMF and TLT aren’t based on the 10yr rate, but that metric is most closely tracked on TV and is an indicator on the short term 20 and 30yr rate direction as well.

    I still don’t quite fully understand these interest rates and how their trends are so easily predicted, but fool just about everyone doing so. Most articles posted here just focus on the correlation aspect between stocks and bonds so maybe that’s all I need to know or care about in this strategy, but I still scratch my head on why the experts can’t get it right when the obvious happens.

    • Alexander Horn
      Keymaster
      Post count: 383

      Agree with your comments, it´s a bit like a gigantic tug of war between two forces of wisdom:
      – Strong fundamental growth, inflation around 2% target, full employment, thus risk of inflation, thus more hikes anticipated
      – Maybe too high valuations (cracks in growth story), tax “goodies” aleady priced in, aggressive hikes might damage equity valuations, so FED probably careful, so maybe long-term yields already overshoot hike expectations. Plus yuuge rate differential between US and Japan/EU pulling money into US treasuries, thus keeping yields lower.

      Hard to tell how this is playing out, so keeping some treasuries is reasonable – especially as the now infamous short term correlation which broke down in recent months has been working better recently again.

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