5 Replies to “Leverage: Not As Scary As You Think”

  1. Hi Daren, just figured out maybe the link I’m including in the comment gets it tossed automatically. Check out “The Lazy Trader” blog post for December 18, 2017. Contains a very good study on the use of leveraged funds.

    1. Mr. Rich Moose says:

      Yes, I have tight controls on comments to keep the blog low maintenance. 🙂
      Great article and thanks for sharing! For those who want to read: http://www.the-lazy-trader.com/2017/12/volatility-and-leveraged-instruments-to-beat-the-markets-part-4.html
      I agree with much of what the article points out. The research is compelling. I love looking at a product that many put alarm bells out on because many times the fear is not warranted at all. Unfortunately we don’t have levered bond ETFs in Canada (yet).
      I find the author’s exposure preference to include inverse volatility (XIV/ZIV) quite interesting. I feel that you are likely to get hit twice using that strategy (once because levered ETFs tend to track poorly in highly volatile environments because of volatility drag and again because high volatility will really hurt your ZIV/XIV returns). Works great in an environment where volatility has been low for longer than any period since the 1960s, but not so sure about other environments.

  2. I think the assumption is that bonds save the day. 2008 is part of the study period and they do the trick then. There are two downfalls: 1) go nowhere markets for stocks and bonds and 2) stocks and bonds crash together (cash is king). The first case would have to rely on ZIV covering the vol drag on the other two provided VIX futures remain in contango. The second case is the achilles heel. Seventy percent of the portfolio is dumping and ZIV likely gets clobbered along with stocks. What are the chances of this? Slim perhaps, but not impossible. A serious stock crash amid rising Treasury yields would mean trouble all around. Of course, the worst scenario would have these happen overnight, which is even more unlikely. TMF and UPRO do have coincident down days, but generally not weeks or months. Interesting stuff, food for thought.

  3. Well, the very unlikely happened. Stocks dumped and treasuries did not save the day, and the inverse VIX ETF’s got slammed the hardest. Will the strategy bounce back? Likely, but that was one roller coaster most would pass on.

  4. Mr. Rich Moose says: Reply

    Yeah, I think a lot of people did not expect anything like this at all. Made me think a lot about Nassim Taleb’s books: Black Swan and Antifragile.
    Good thing Lazy Trader said he only allocated $10k to the strategy.

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