In our last post we took a quick look at the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF). The Financial Times referred to it as the Cocaine Bear of ETFs. I would probably call it a fire cracker, lit in your hands. In that post we modeled a 60/40 portfolio comparison with one portfolio having a 40% allocation to the iShares 20+ Year Treasury ETF (TLT), the unleveraged version, and the other portfolio having 13.33% in TMF and 26.67 in cash to see if there could be a capitally efficient effect by leaving 26+% in cash to mitigate sequence of return risk. In theory, they are the same portfolio. In reality, they weren't miles apart but it wasn't terribly compelling and not something I would do in the real world.
Another thought occurred to me about seeking an capitally efficient outcome using TMF. The idea of today's portfolios is a "normal" allocation to equities at 60%, 10% in longer dated treasuries and 30% in an alt that pretty reliably offers an absolute return (horizontal line that tilts upward) no matter what is going on in the world. For that I went with client and personal holding the Merger Fund (MERFX).
Portfolio 3 is 100% Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. Portfolios 1 and 2 should be the same thing. 3.33% to TMF could be a proxy for 10% in TLT (we'll get to the details in a sec). The extra 6.67% that I have going BIL potentially offers a little more protection against an adverse sequence of returns in case long bonds and stocks do a repeat of 2022.
The difference with the much smaller weighting to TMF in Portfolio 2 than yesterday's post actually tracks much closer to the TLT version with a slight performance nod to Portfolio 2. I would note that in 2022, Portfolio 2 outperformed Portfolio 1 by 80 basis points which really surprised me.
We know from yesterday's post that 13.33% in TMF deviates quite a bit further from TLT than today's 3.33% allocation but let's dial it up to 5% TMF and 15% TLT, taking MERFX to 25% and BIL up to 10% which gives a little more insulation against an adverse sequence of returns.
The return for Portfolios 1 and 2 are oddly identical, the standard deviation for the version that leverages down with TMF is a shade lower. The daily reset mechanism of the leveraged ETFs means you have no idea how closely they will track to their corresponding unlevered versions. It would be nice if you knew they would but being direct, that isn't their objective. It might work out that way and this back tests shows it is possible but that is not the objective.
In the earliest days of blogging, I made the obvious observation that funds would only evolve to offer access to increasingly sophisticated strategies and exposures which would allow investors to create more sophisticated portfolios. That has of course played out and will continue to do so, maybe even with leveraged products. The ideas we played around with in this post are not crazy even if they don't get implemented by anyone. If a 3-5% allocation to something, 3X leveraged or anything else, that would be a bummer but unlikely to end in plan altering ruin. I think there is value in understanding some of these concepts in case they ever do become more investable.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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