Three Leveraged ETFs for portfolio construction: SPXL,TMF,AGQ

We would like to propose three leveraged ETFs:

SPXL - Direxion Daily S&P500 Bull 3X Shares
TMF - Direxion Daily 20+ Year Treasury Bull 3X Shares
AGQ - ProShares Ultra Silver
(or alternatively UGL - ProShares Ultra Gold)

Although these ETFs are popular with retail investors and speculators, the reason we propose these is to allow us to run diversified crypto/stocks/bond/metals strategies, using mAssets on DEFI protocols such as TokenSets/Enzyme/dHedge.

We believe these ETFs are necessary for constructing:

  • A diversified portfolio that contains the three basic asset classes that traditional managers utilize, namely Equities, Bonds and precious metals
  • Risk adjusted portfolios: The leveraged versions are necessary so that the volatility of the traditional asset classes increases substantially and come closer to the high volatility of crypto assets. Once all asset share similar volatilities, creating risk optimized portfolios is possible while still controlling risk by adjusting portfolio exposure to less than 100% if necessary.

Needless to say, It would benefit our subscribers and followers to run our portfolios while earning additional yield on their mAssets.

Feel free to read about our first simple hybrid strategy portfolio:

Thanks for your time!

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Why would you choose SPXL over UPRO?

No reason really other than SPXL has a longer history for backtesting. Both have similar performances. UPRO would work as well.

logicalnvest, quick question: Do you intend to use these in a long term investable portfolio?
Or mostly to take on short term speculative positions?

I am generally in favor of whitelisting leveraged ETFs, but I see them useful for the most part only to take short term bets on an asset class.

The reason is because they tend to suffer of volatility decay, which if you buy and hold them tends to erode significantly your returns over time.

Ah young padawan, let me open your eyes: “volatility decay” is a myth that TradFi regulators perpetuate to mislead retail investors away from leveraged ETFs. Yes, your average person shouldn’t be touching them but volatility decay isn’t what they’ve told you it is.

SPY since 3/23/2020 is up 61%
UPRO (3x SPY) since 3/23/2020 is up 223% (3.65x as much – despite you holding it for over a year and a half)

The truth is that these ETFs tend not to return exactly 3x as they are based on daily rebalances – but making 2x return is much better than 1x, no?

For further reading check out HedgeFundie’s Excellent Adventure on the Bogleheads forum

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Ok, To me Volatility Decay is very real. It happens because the ETF is rebalanced daily, so you realize the loss the day it drops. Unlike a Future contract for example that will always be on the same nominal amount.

I’ve played around with these quite a bit back in the days when I was trying to design a Risk Parity investment strategy with leverage (with leveraged ETFs). Surprisingly Investopedia has a pretty good article about it: Dissecting Leveraged ETF Returns

I think if you want to gain long term levered exposure to an index, perhaps Levana is your best bet: Levana - Leverage Any Asset

All of that said, I am definitely in favor of adding them to Mirror. I would upvote it.

Volatilty decay exists but

  1. We rebalance monthly, so positions are adjusted and not held passively.
  2. The leverage ‘decay’ does not always have a negative drag on returns, it can actually boost returns in a bull market. It is path depended. A straight up move from 100 to 200 (100% return) will provide more than 300% return on a 3X leveraged product (as Mr. MIR pointed out), while a choppy move from 100 to 200 will return less than 300%.
  3. Decay is correlated to volatility. So for products based on stock market volatility, the decay for a 3x ETF is acceptable, if held for a short/moderate time.
  4. Empirically, running strategies using these 3x ETFs does work.

However, holding leveraged token based on ETH or other crypto is a different thing. Crypto volatility is usually 4-6 times that of the SP500. So holding onto a 3x ETHBULL with no adjustments, will probably ruin you in the long run.

Dohko, thanks for the suggestion. We 'll keep an eye on Levana.

The first two securities you mentioned - SPXY and TMF - operate on 3X leverage.

Would it be worth constructing an upper limit on leverage for future mAsset listings to protect users for over leveraging? I think it could help provide security and prevent grave losses.

Still awaiting SPXL TMF mirror asset. These assets will greatly enhance the user experience. Bare minimum we need SPXL.

I voted yes on your proposal…oh wait, you didn’t make one