Leverage Is Easy To Misuse

An update on the Tradr 2X Long SPY Weekly ETF (SPYB). The fund is 2x leveraged but unlike most leveraged funds, it does not reset daily, it resets weekly. SPYM from the same shop resets monthly. SPYB went through it's first weekly reset and while SPY was up 112 basis points on Monday, SPYB was up 218 basis points. So it didn't nail it to the basis points for perfect tracking but that is very close as a first impression. 

I mentioned the other day the possibility that the reset for these funds could be bigger than the daily funds. I'm not sure if that is simply wrong or hasn't come into play because of how the market did last week, almost straight down. Either way, it's a good first showing but it is still too early to draw any sort of conclusion. 

If you play around with the ProShares Ultra S&P 500 (SSO) which is a long standing 2x long fund with a daily reset, you'll see it is pretty close far more often than not. The potential for the new Tradr funds, especially the quarterly if it lists is a much simpler way to create a capitally efficient portfolio than with the multi-asset ReturnStacked suite. 

You wouldn't need to put your entire equity allocation into SPYB, meaning building a 60% weighting with a full 30% to SPYB, but maybe 50% into a plain vanilla ETF and 5% into one of the Tradr funds which gets you to 60% net long exposure leaving 5% left over for a little defense like client/personal holding BTAL which as we've looked at dozens of times has improved long term returns and lowered volatility. If somehow the Tradr fund malfunctions, you'd only be in for 5%

I think all of that lives up to the idea of a lot of simplicity hedged with a little complexity. 

Backtesting with SSO, the daily resetting fund, it does exactly what I'm talking about. Both versions with the leverage and BTAL look pretty similar long term with a small, but beneficial, impact on CAGR and a bigger impact on standard deviation. 

There may never be a consequence for these newer funds that use leverage or to the investors who misuse the leverage available via these funds, I have no idea and that is the point, it is not knowable. This is similar to what we talked about here and other places for many years about all time low interest rates that kept going lower. The risk was there all the way down and there may have never been a consequence, it turns out there was in 2022, but the risk was there. Same with misusing leverage. That has been a contributing factor to countless crises over the years and will be again at some point. 

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