This meeting West gave a presentation on leveraged ETFs as a long term hold vessel. West also talked about different strategies to get gains but decrease risks, how important diversification is with these strategies and how necessary it is for an investor to be risk tolerant and not make trades on emotion.
Leveraged ETFs borrow money to amplify potential returns or losses, this can be beneficial but also carries more risk. As a result of these funds borrowing money to amplify returns or losses, in a sideways market the investor is ultimately losing money due to beta decay and the interest that must be paid on the borrowed money.
Modern Portfolio Theory (MPT) is the idea that if an investor is taking more risk they should be making more money. With this idea comes the Efficient Frontier, this is a graph that indicates the best possible portfolios offering the highest return for the given level of risk.
Leveraged ETF Strategy examples:
HFEA
This strategy is used to capture long term upward trends of the stock market using a 3x S&P 500 ETF and a 3x 20year treasury ETF to cushion against large draw events. This strategy is often utilized at a 55/45 split. The downsides to this strategy are High interest rates can be bad for both bonds and stocks. Another thing to consider with this strategy is the fact that as of the last few years, bonds have not been performing as well resulting in the compound annual growth rate to be less than other strategies.
9-Sig
This strategy utilizes TQQQ and AGG aiming for 9% growth in TQQQ each quarter. This strategy starts out with roughly 60/40 TQQQ/Bonds. Each quarter, the investor sells surplus over 9% or buys short fall under 9%. Essentially the goal of this strategy is to value average into TQQQ and rebalance quarterly. The downside to this strategy is if there is a consistent downtrend of TQQQ the investor may run out of AGG and have to hold TQQQ and ride it out.
200-SMA
This strategy uses a combination of SSO and BIL, a 1-3 month T-Bill ETF. When the price of SSO is above the 200 day simple moving average then the investor should be 100% in SSO. When the price of SSO is below, then the investor goes all in on BIL. The idea here is that the market has more consistent returns above and most black swan events happen below. This strategy offers volatility protection and downside protection. The downside here is it requires more monitoring and more trades than other strategies.
You can learn more about leveraged positions in the article below.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741701
Next meeting: VU567, 5:45-7:00 PM, 2/26!
Categories: Club Updates
