Leveraged ETFs are the most evil and dangerous instruments in the Stock Market, or so you would think after reading the countless articles on how you can lose a ton of money in a blink of an eye. Heck, read the prospectus of any 3x leverage ETF and you’d think they really don’t want you to invest in their product. To make matters more comical, there’s an obscene number of articles that claim index funds as the safest and most profitable thing Wall Street Gods have ever created – so good are these index funds that they are beating the professionals at their own game.
Most of this literature revolves around the fact that you shouldn’t invest in any daily leveraged ETFs for more than one day. In other words, this is an instrument created essentially for day traders. It is true that you could lose all your money if you invest for periods longer than a day just as it is true that you’ll most definitely crash your car if you’ve had several mugs of beer and proceed to drive your car. In other words, you can’t blame your car for a drunk-driving crash as much as you can’t blame Leveraged ETFs for your loss of money.
I’m not even going to discuss whether day traders in general are successful at trading anything profitably over longer periods of time- they are not. But, we crunched the numbers and, under different set of circumstances, Leveraged ETFs can be in fact safer and more profitable, over the long term, than your typical plain vanilla index funds.
It’s actually quite simple, although computationally intensive (we’ll teach you how to do it): It involves creating a portfolio with various proportions of leveraged ETFs to cash or equivalents. For example, you could invest 80% on a 3x daily ETF and 20% of treasury bills. You’d study various proportions and backtest them to see how they would have performed over time. For added safety, you can chose to rebalance every so often to bring your portfolio proportions back to their original values.
Case and point, a picture is worth a thousand words and here’s an Example of how the TQQQ (ProShares UltraPro QQQ aka the 3x daily Leverage of the Nasdaq-100 ETF) performed using various proportions that are rebalanced every so often.
As you can see, a 100% investment over the long term in the TQQQ is suicide but, look at the other portfolio displaying the various proportions of TQQQ to Cash Equivalents… they’re leaving the Market in the dust over the long term and doing so by risking substantially less money (aka doing so in a much safer than investing 100% of your money in the index fund of the S&P 500).
We don’t want to trash Index funds, after all they are indeed profitable, and depending on what you get, you can either match or beat the S&P 500 over the long term and even do better than practically all professional Money Managers but, Leveraged ETFs are no comparison. They not only beat the market, they crush it, and doing so in a way that uses less of your money.
To learn more about this method, please look at our Video Presentation.
