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Sunday, January 5, 2020

Leveraged ETFs Portfolio - 2019 Results

This is my small account inspired by the Volatility and Leveraged Instruments to Lazily beat the Markets series.

I'm happy to report it is not such a small account anymore. 2019 was a great year for the Leveraged Portfolio. But like they say, an image is worth a thousand words. Here's a snapshot of the Track record page after market close on December 31:

Up 49.3% for the year, easily crushing the S&P500 this time around.
All the components were positive: UPRO +101.3%, ZIV +19%, TMF +33.4%.

I'm glad I decided to stick to this approach for the long run despite the bad results in 2018.

Speaking of 2018, it was a special year because it included the type of environment that had not been covered by my back-test analysis up to that point: an Increasing Interest Rates environment. Some of you may remember that everything was down in 2018. ZIV was down, UPRO was down because equities were negative overall. Bonds also went down! It was a nightmare. I failed to understand that during periods of interest rates increases, long-term bonds suffer, however, short term bonds suffer much less, and their presence in the portfolio helps soften the blow. A combination of long term and short term bonds makes the portfolio a little more immune to interest rates policies, as I learned later while reading Passive Investing on Steroids by Daniel Fernandez.

2019 happened to be that type of environment again where the Fed was more accommodating and kept lowering interest rates. But going forward, I'll prefer to isolate the portfolio from this type of concern so, a few changes have been introduced for 2020:

After the new fresh capital addition of $5,000 I changed the portfolio from

 30% UPRO, 30% ZIV, 40% TMF


 50% UPRO, 25% TMF, 25% TYD

So, I removed the short volatility component (ZIV) and introduced short term bonds. ZIV was highly correlated to UPRO anyways, and would go in tandem with UPRO almost all the time.

Yes, I increased UPRO from 30% allocation to 50%, but the portfolio is less risky!  Why?  Well, because, before this change, the "growth" component of the portfolio was 60% (UPRO 30%, ZIV 30%). By increasing UPRO to 50%, but removing ZIV altogether, the "growth" component of the portfolio has been reduced from 60% down to 50%. The hedging component of the portfolio (formerly TMF 40%) has been increased to 50% allocation by reducing TMF to 25% and introducing TYD at 25%.

My back-tests show a 23.4% avg annual return using this new combination, going back to the 2008 financial crisis and a max draw-down of 42%, slightly better than the 50%+ of the previous portfolio. The standard deviation of the returns is also smaller, suggesting a smoother ride. So, I'm giving up about 1% of the annual return, in exchange for less volatility in the portfolio and fewer concerns.

For those scared of 3x leverage, the 2x approach would be:  SSO (50%), UBT (25%), UST (25%) with average annual returns around 16%, but obviously smaller draw-downs and less volatility overall.

We'll see what 2020 brings with the elections and all. It will be an interesting year, but regardless, this is a long-term thing, so I expect to keep holding it for many years to come.


Results of the Leveraged ETFs portfolio are tracked live here.

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