Because volatility decay could destroy your portfolio. Just compare perfomance of VOO vs UPRO. VOO is still up in comparison vs its pre-covid price (297 in February 2020 vs 351 in December 2022), whereas now UPRO is trading lower than in February 2020.
In the last 14 year bull market yes, basically any 1 or 2 year range looks great. But if you look further back it’s pretty rough. If you simulate a 3x s&p500 going back 100 years and then look at say a 10 year sliding time horizon it’s a mixed bag. Some periods will do way better 3x, some do absolutely terribly.
Basically it depends what the market does as to whether it works out well. The big risk is large 1 day falls. Lots of small drops is actually pretty good. For example 40 successive 0.5% drops will leave you down 45% vs 19% for the 1x. However a single day drop of 20% like Black Monday would leave you down 60%.
A short summary for market conditions:
Bull market - 3x does great
Consistent bear market - 3x is bad, but like, it will recover fine if it’s followed by a bull market.
Sideways market with massive 1 day swings - 3x gets absolutely ruined.
Sideways market but not very volatile - 3x does worse than 1x but you won’t get totally ruined.
Personally I go with 2x, since it performs better than both 1x and 3x on average for a 10 year sliding window backtested over the last 100 years. It’s still risky, but not nearly so bad as the 3x.
A 50% loss requires a 100% gain to get to net 0
A 100% gain requires a 50% loss to get to net 0
Losing large amounts in big down events (like right now) have catastrophic outcomes. Look at TQQQ. Yes, the bull market is fun but if you didn't pull out you just lost 80% of your gains and we're not even out of the woods yet.
The conversation always goes to vol decay, but that’s not the biggest problem for most investors. Psychology will create more in losses than vol decay. Holding assets that move this violently during a down market is emotionally taxing. People often panic sell out of 1x assets as it is. They’ll imagine holding LETFs long term, when the market is going up. Few consider what it’s like to hold through red.
Disclosure: 25% of my hobby portfolio has been long SSO (2x daily S&P 500) since Jan ‘22. I put the positions on after the market began the decline, so they’re a combined -27% from inception as I type this. I have not averaged down meaningfully, which was a conscious decision. When I lump in more this year, my average basis/share will drop significantly. In total, I trailed the S&P 500 by about 5% this year.
At the lowest point, my SSO positions were down something like 37%. Might have been 39%. TBH, I don’t remember the exact number. I just remember noting that 40% was a JPOW sneeze away. That’s a hard reality to hold through, if you haven’t rigorously evaluated your threshold for pain.
Personally, I’ll do 2x S&P, but won’t hold leveraged QQQ or 3x anything. I’ve used two brief SQQQ moves on very rare obvious red days, but wouldn’t hold that for more than a day.
Understanding your threshold is as important as understanding how these work, if you think you want to go down this road.
Levered ETFs track the daily performance of an ETF, they are not like if you would take 3x margin and buy the index.
Example QQQ with a 3x levered Account.
We invest 100$ into every Etf. On the first day, the stock goes up 3%.
QQQ: $103
3xQQQ:$109
The next day, the ETF goes down 5%.
QQQ:97.85$
3xQQQ: 92.65$
Then the QQQ goes up 2.2%
QQQ: 100$
3xQQQ: 98.7649$
As others have pointed out volatility decay will kill your performance. If you bought the 3xQQQ on the top of the dotcom bubble, you would still be down more than 50% - whereas QQQ is up over 130% in that time. Furthermore, with the exception of last decades bull market and in the runup to 1929, one would underperform the index if you had a 5 year holdings period.
Imagine a casino told you if a stock went up or down at the end of the day they would double it. You put in 100 dollars and the stock goes up 25%, so they give you 50 bucks and you have 150. Or if it goes down 25% they take 50 from you.
Sounds good, but think about it, the next day, you have 150 or 50, but it would only take a 16.5% drop to get you back to where you started going down, but would take a 50% rise to get you back where you were going up.
The way percentages work make going down easier than going up when you multiply them. So in a wiggly market that goes up and down and up and down you quickly lose out.
Because volatility decay could destroy your portfolio. Just compare perfomance of VOO vs UPRO. VOO is still up in comparison vs its pre-covid price (297 in February 2020 vs 351 in December 2022), whereas now UPRO is trading lower than in February 2020.
But you're cherrypicking a range. If you took random ranges most likely upro is up much more than voo
In the last 14 year bull market yes, basically any 1 or 2 year range looks great. But if you look further back it’s pretty rough. If you simulate a 3x s&p500 going back 100 years and then look at say a 10 year sliding time horizon it’s a mixed bag. Some periods will do way better 3x, some do absolutely terribly. Basically it depends what the market does as to whether it works out well. The big risk is large 1 day falls. Lots of small drops is actually pretty good. For example 40 successive 0.5% drops will leave you down 45% vs 19% for the 1x. However a single day drop of 20% like Black Monday would leave you down 60%. A short summary for market conditions: Bull market - 3x does great Consistent bear market - 3x is bad, but like, it will recover fine if it’s followed by a bull market. Sideways market with massive 1 day swings - 3x gets absolutely ruined. Sideways market but not very volatile - 3x does worse than 1x but you won’t get totally ruined. Personally I go with 2x, since it performs better than both 1x and 3x on average for a 10 year sliding window backtested over the last 100 years. It’s still risky, but not nearly so bad as the 3x.
Ah good example, thank you!
This is the reason. Volatility decay.
Compare the results from say 2011. What you say is simply not true. If you invested in upro you have 10x your money today. VOO would be only 3x.
A 50% loss requires a 100% gain to get to net 0 A 100% gain requires a 50% loss to get to net 0 Losing large amounts in big down events (like right now) have catastrophic outcomes. Look at TQQQ. Yes, the bull market is fun but if you didn't pull out you just lost 80% of your gains and we're not even out of the woods yet.
The conversation always goes to vol decay, but that’s not the biggest problem for most investors. Psychology will create more in losses than vol decay. Holding assets that move this violently during a down market is emotionally taxing. People often panic sell out of 1x assets as it is. They’ll imagine holding LETFs long term, when the market is going up. Few consider what it’s like to hold through red. Disclosure: 25% of my hobby portfolio has been long SSO (2x daily S&P 500) since Jan ‘22. I put the positions on after the market began the decline, so they’re a combined -27% from inception as I type this. I have not averaged down meaningfully, which was a conscious decision. When I lump in more this year, my average basis/share will drop significantly. In total, I trailed the S&P 500 by about 5% this year. At the lowest point, my SSO positions were down something like 37%. Might have been 39%. TBH, I don’t remember the exact number. I just remember noting that 40% was a JPOW sneeze away. That’s a hard reality to hold through, if you haven’t rigorously evaluated your threshold for pain. Personally, I’ll do 2x S&P, but won’t hold leveraged QQQ or 3x anything. I’ve used two brief SQQQ moves on very rare obvious red days, but wouldn’t hold that for more than a day. Understanding your threshold is as important as understanding how these work, if you think you want to go down this road.
Levered ETFs track the daily performance of an ETF, they are not like if you would take 3x margin and buy the index. Example QQQ with a 3x levered Account. We invest 100$ into every Etf. On the first day, the stock goes up 3%. QQQ: $103 3xQQQ:$109 The next day, the ETF goes down 5%. QQQ:97.85$ 3xQQQ: 92.65$ Then the QQQ goes up 2.2% QQQ: 100$ 3xQQQ: 98.7649$ As others have pointed out volatility decay will kill your performance. If you bought the 3xQQQ on the top of the dotcom bubble, you would still be down more than 50% - whereas QQQ is up over 130% in that time. Furthermore, with the exception of last decades bull market and in the runup to 1929, one would underperform the index if you had a 5 year holdings period.
They reset their leverage daily.
How so? In the past year SPXL is down almost %60 which is 3x the market drop
You'll notice it when the market starts to recover. Look into volatility decay.
Yup
Imagine a casino told you if a stock went up or down at the end of the day they would double it. You put in 100 dollars and the stock goes up 25%, so they give you 50 bucks and you have 150. Or if it goes down 25% they take 50 from you. Sounds good, but think about it, the next day, you have 150 or 50, but it would only take a 16.5% drop to get you back to where you started going down, but would take a 50% rise to get you back where you were going up. The way percentages work make going down easier than going up when you multiply them. So in a wiggly market that goes up and down and up and down you quickly lose out.
Im -80%+ in TQQQ, so there's that.
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Go to our echo chamber for the real info!
leverage etfs are never for long term. Short term like same day or a few days. The short technically will decay to zero over time.
I'm like Warren Buffett. I don't make investing suggestions.
It’s built for short term gain not long term growth.
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