Would a portfolio of all Leveraged ETFs be safe?

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  • #80270
    robininni
    Participant

    I am interested in a portfolio I created using only USMx2 and GLD-USD, holding approximately 45% USMx2 and 55% GLD-USD. These two strategies seem to be non correlated and work very well together and looking back at the past performance, the max drawdown vs the CAGR looks inviting to me. Is there any risk I am not accounting for with holding only leveraged ETFs? Risks not related to just market movements? Risks inherent to leveraged ETF such as how they are created/what they actually invest in? I would not want to invest all of my funds into various leveraged ETFs to make this portfolio if leveraged ETFs in and of themselves have additional risk not accounted for in back testing performance. Thanks.

    #80277
    Vangelis
    Keymaster

    You should do your own research but some additional risks inherent in leveraged ETFs is price decay
    https://rightsideofthechart.com/leveraged-etf-price-decay-explained/
    as well as what happened to XIV, which is termination by the issuer when price swings of the underlying become too extreme.
    https://www.investors.com/etfs-and-funds/etfs/investors-lawsuit-lost-money-xiv-meltdown/
    Using leveraged products always contains a greater risk of ruin (for you and the issuer) and backtests never fully reflect future black-swan events. You should always prepare for much higher drawdowns of what backtests show. Backtest drawdown numbers are most useful for comparing one strategy vs another.

    #80314
    robininni
    Participant

    Thanks for the reply. I noticed that the Portfolio Library’s selection all now are comprised partly or almost completely of the leveraged ETFs. For instance, the “max drawdown less than 15%” is now comprised of: EUO, QLD, SSO, UBT, UGL, and YCS (and GLD being the only non leveraged ETF).

    I assume these portfolios in the library are considered appropriate for one’s entire investment portfolio and not meant to be a small portion of a larger, ‘safer’ investment scheme? If so, then I assume these 2x leveraged ETFs are considered safe or at least not excessively risky and therefore having a portfolio comprised of only EUO, YCS, QLD, UBT, and UGL would also not be excessively risky assuming assets are distributed fairly equally among the choices. Is this correct? Is it just the 3x leveraged ETFs than one should be extra careful with?

    #80322
    Alexander Horn
    Keymaster

    We’re aware of the risk involving leveraged ETF in our portfolios, and had long discussions over the last months how much use to give them. For the time being we’ve excluded them from the conservative and moderate Core Portfolios, but opted to leave them in the “general purpose” portfolios in the library.

    For a 30 years old investor with a solid income from his day-job the risk perception is completely different than for a 65+ investor who is living off the investment income. We cannot and do not want to “advise” for individual life circumstances, but rather offer a choice of “pre-canned” portfolios and tools to assess the own risk preference and adapt the portfolio to it.

    So our intention with these portfolios really is to offer them as a base for modifying them into a “custom portfolio” based on the individual risk/return preference. We’ve outlined that process and the available tools in this recent post: https://logical-invest.com/creating-a-custom-portfolio/

    .. back to your question: “Is it just the 3x leveraged ETFs than one should be extra careful with?” Well, it depends on your net worth, income, years to retirement and most importantly: how much volatility your gut can handle. Try the portfolio optimizer, “ride” some equity curves over stressful periods, and try to get a feeling where your individual risk/return level is.

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