Stricktly +EV for a Young Investor

[DcifrThs]

[ QUOTE ]
Can you leverage with ETFs and passive management? I don't mean to beat this like dead horse, but I don't know a lot of the words you used (mainly just sharpe ratio) nor how to 'lever up or down'. Should I make this a new thread or is this enough about +EV to keep this here?

PS: I looked up Sharpe Ratio and kind of understand it and then looked it up for the index funds I have but still have no idea where to go next.

[/ QUOTE ]

you can probably start a new thread...or putit in the "ask dcifrths" thread i made a while back.

overall, if you don't know what sharpe ratio is, you won't easily pick up all the concepts necessary for you to be able to construct an "optimal" portfolio by yourself.

but i'll do as best i can to answer your Qs.

Barron

[gull]

Leveraged ETFs should NEVER be used for buy and hold portfolios. These ETFs capture twice the DAILY movement of the S&P 500. However, they come nowhere near capturing twice the long-term movement of the S&P 500. With leveraged ETFs, you massively increase your risk without a corresponding increase in return. These ETFs are instruments for traders, not index funds on steroids.

[maxtower]

gull, thanks for the explanation.

[DcifrThs]

[ QUOTE ]
Leveraged ETFs should NEVER be used for buy and hold portfolios. These ETFs capture twice the DAILY movement of the S&P 500. However, they come nowhere near capturing twice the long-term movement of the S&P 500. With leveraged ETFs, you massively increase your risk without a corresponding increase in return. These ETFs are instruments for traders, not index funds on steroids.

[/ QUOTE ]

what about leveraged TIPS or ST US treasuries? do they work the same way?

i figured they would provide an easier way to generate leverage than the alternative which takes way more work and knowledge.

further, why don't 2x daily moveemnts = 2x annual movements? it seems to follow from logic that if every single day you generate 2x your daily price move, you will in effect have doubled your overall exposure.

i think of it like my leveraged S&P500 account via repos.

if you leverage an S&P500 fund exposure 2:1, you get 2x the exposure period. daily, weekly, monthely, whatever. you basically own a bit leses than 2 "funds" for a little bit more than the price of 1 (repo rate + initial money used to purchase the S&P500 allocation).

this is an example since repos are mostly used for bonds.

anyways, there was a long thread about 2x ETFs and that since they are managed there may be some isues with them hitting every daily total at 2x the S&P close.

i guess i may need to read a study or two on how these things function if you tell me that they don't match 2x the underlying.

i just don't see how if you hit the 2x exposure every day you could come out at anything other than 2x the exposure over any measured time period...

Barron

[maxtower]

Barron,

I think it must be the case that you get slightly less than 2x the increases, but slightly more than 2x the decreases. Over time, you'll lose. Is this because of the interest paid to leverage?

Max

[adios]

Not necessarily true. If the past is any indication of the future (I fully admit that it may not be), people have been over compensated for the risk of owning stocks. Put another way the risk premium paid to stock owners is too high for the inherent risk of owning stocks for long holding periods. Again if the past is any indication of the future stocks have never been under water after a 20 year holding period if memory serves. I think it's clear that when one is over compensated for taking a risk (for stocks it's been by a very big margin) leveraging up is just fine. What do you believe the equity risk premium should be and just as importantly what do you think it actually will be? I assume you have some idea since you've recommended that people by index funds.

BTW SSO since it's inception has increased by 29.7% while during the same period SPY has increased by 15.8%. SSO has not increased proportionally with the risk taken but if the risk taken is over compensated by a great deal than taking twice the risk is fine IMO.

[adios]

[ QUOTE ]
[ QUOTE ]
Leveraged ETFs should NEVER be used for buy and hold portfolios. These ETFs capture twice the DAILY movement of the S&P 500. However, they come nowhere near capturing twice the long-term movement of the S&P 500. With leveraged ETFs, you massively increase your risk without a corresponding increase in return. These ETFs are instruments for traders, not index funds on steroids.

[/ QUOTE ]

what about leveraged TIPS or ST US treasuries? do they work the same way?

i figured they would provide an easier way to generate leverage than the alternative which takes way more work and knowledge.

further, why don't 2x daily moveemnts = 2x annual movements? it seems to follow from logic that if every single day you generate 2x your daily price move, you will in effect have doubled your overall exposure.

i think of it like my leveraged S&P500 account via repos.

if you leverage an S&P500 fund exposure 2:1, you get 2x the exposure period. daily, weekly, monthely, whatever. you basically own a bit leses than 2 "funds" for a little bit more than the price of 1 (repo rate + initial money used to purchase the S&P500 allocation).

this is an example since repos are mostly used for bonds.

anyways, there was a long thread about 2x ETFs and that since they are managed there may be some isues with them hitting every daily total at 2x the S&P close.

i guess i may need to read a study or two on how these things function if you tell me that they don't match 2x the underlying.

i just don't see how if you hit the 2x exposure every day you could come out at anything other than 2x the exposure over any measured time period...

Barron

[/ QUOTE ]

Repo's have margin calls. That's why a lot of mortgage lenders are tanking including Thornburg (TMA) which Jimbo posted about. TMA did its short term funding with repos to leverage themselves in buying Mortgage Backed Securities/bonds (MBS). When the bottom fell out of non agency MBS they got a bunch of margin calls on their repo agreements. TMA had a fire sale of over $20 billion in MBS this week. TMA was leveraged something like 21 times on those bonds. They've significantly deleveraged which means their profits and book value will suffer considerably. I still think they'll be luck to make it but possibly. Anyway no margin calls on SSO unless ..... [img]/images/graemlins/smile.gif[/img].

[Jeff W]

[ QUOTE ]
Here's a way to beat the market.

SSO - Ultra S&P 500

The Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500® Index

If the market's "guaranteed" (equity risk premium) to be up over a 20 year holding period, then obviously this will do better. It's an ETF that's highly liquid for most on this forum I suspect.

[/ QUOTE ]

Search this forum for +Rydex +Nova

Leveraged funds/etfs suck for long term investors.

[DcifrThs]

[ QUOTE ]
Barron,

I think it must be the case that you get slightly less than 2x the increases, but slightly more than 2x the decreases. Over time, you'll lose. Is this because of the interest paid to leverage?

Max

[/ QUOTE ]

think of it this way: without any haircut or repo rate for the collateralized loan, you'd get 100% of the gains on 2*S&P500 and 100% of the losses on S&P500.

now, with a repo, you get 100% of the gains on 1.98*S&P500 and 100% of the losses on 1.98*S&P500

for that, you pay a repo rate of something near the risk free rate (typically, for some reason historically, slightly under it) AND, since you have counterparty risk, you don't get 100% of the face value of your collateral. this is a haircut.

so you pay a flat fee (repo rate) and, for that fee, get 100% of all the gains and losses on almost 2*your underlying.

anyways, everybody, i was just using this as an EXAMPLE. if i really wanted leverage on an S&P500 position, i'd go to the futures market as it is cheaper and doesn't give a haircut.

the point of the example was to show that if you get X* daily losses and X*daily gains, then you MUST get X* yearly losses and X* yearly gains. i don't see how that is not the case.

Barron

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Leveraged ETFs should NEVER be used for buy and hold portfolios. These ETFs capture twice the DAILY movement of the S&P 500. However, they come nowhere near capturing twice the long-term movement of the S&P 500. With leveraged ETFs, you massively increase your risk without a corresponding increase in return. These ETFs are instruments for traders, not index funds on steroids.

[/ QUOTE ]

what about leveraged TIPS or ST US treasuries? do they work the same way?

i figured they would provide an easier way to generate leverage than the alternative which takes way more work and knowledge.

further, why don't 2x daily moveemnts = 2x annual movements? it seems to follow from logic that if every single day you generate 2x your daily price move, you will in effect have doubled your overall exposure.

i think of it like my leveraged S&P500 account via repos.

if you leverage an S&P500 fund exposure 2:1, you get 2x the exposure period. daily, weekly, monthely, whatever. you basically own a bit leses than 2 "funds" for a little bit more than the price of 1 (repo rate + initial money used to purchase the S&P500 allocation).

this is an example since repos are mostly used for bonds.

anyways, there was a long thread about 2x ETFs and that since they are managed there may be some isues with them hitting every daily total at 2x the S&P close.

i guess i may need to read a study or two on how these things function if you tell me that they don't match 2x the underlying.

i just don't see how if you hit the 2x exposure every day you could come out at anything other than 2x the exposure over any measured time period...

Barron

[/ QUOTE ]

Repo's have margin calls. That's why a lot of mortgage lenders are tanking including Thornburg (TMA) which Jimbo posted about. TMA did its short term funding with repos to leverage themselves in buying Mortgage Backed Securities/bonds (MBS). When the bottom fell out of non agency MBS they got a bunch of margin calls on their repo agreements. TMA had a fire sale of over $20 billion in MBS this week. TMA was leveraged something like 21 times on those bonds. They've significantly deleveraged which means their profits and book value will suffer considerably. I still think they'll be luck to make it but possibly. Anyway no margin calls on SSO unless ..... [img]/images/graemlins/smile.gif[/img].

[/ QUOTE ]

yea, i can't stress enough the importance of the word intelligent before the word leverage when i make that kind of statement.

just because you CAN get 21:1 on something, doesn't mean you should.

in other news, margin calls on repos should only happen if the value of the security being used is in question, or the solvency of the counterparty is in question. since they are collateralized loans (i think in dollar terms, most repos involve US treasury bills, notes and bonds), there shouldn't ever really be margin calls.

in this case though, i'm sure that if the company in question had just a few prime brokers, theose guys knew what was going on and even if the value of the securities wasn't in question, they'd probably get a margin call or two. but then if the value of the underlying securities are called into question (as they have been on all types of paper but especially MBSs), then it's a double whammy.

interesting stuff.

Barron

PS- i just reread my post you quoted and i said "i think of it like my ...leveraged S&P500 account."

i do not have any kind of leveraged S&P500 account using repos. that'ss illy. sorry for the confusion.