I Need More Leverage

I've been hoppin around lately so just a few more quick hits today.

Cliff Asness sat for a 30 minute interview on Bloomberg TV this morning with a couple of great tidbits including a comment about leveraged ETFs. He said they can be additive to express short term tactical views but then he said he would ask why the person has short term tactical views implying it's nothing but guesswork. The quant strategies AQR runs trade actively but the difference is they are doing what the code tells them to do. That may not appeal to you of course but it is different than guessing without a quantitative model on what a stock will do. 

Speaking of leverage, VolatilityShares listed a 2x corn ETF with symbol CORX.

Eric Balchunas from Bloomberg was baffled because the 1x version only has $60 million in AUM and trades about $1 million per day.

There was an article on LinkedIn (via Abnormal Returns) by Victor Haghani that dug into the math working against leveraged ETFs. In addition to the sequence of up and down days playing a role in how closely it tracks or doesn't track the underlying, the 2x long Microstrategy are having trouble finding dealers to provide enough swaps exposure to manage the funds, sending the providers to the options market which can be less precise than swaps. 

We look at these from time to time because they are interesting but to be clear, I've only used inverse funds tied to the S&P 500, no single stock products or any other indexes and I am assuming that anyone reading this understands that the boilerplate for all these funds says the holding period should just be one day. The exception are the new Tradr ETFs that target, weekly, monthly and quarterly holding periods.

All of that noted, as we've observed many times over many years, the funds that leverage up the S&P 500 or go inverse seems to track the closest of any other index funds. The individual stocks being more volatility would not give me confidence to do anything more than a very short term trade but that sort of trading is not my thing, not even a little bit. 

Yes, the inverse fund is off looking at the two year period but the 2x long is pretty close and it usually is pretty close. YTD SSO is up 51% versus 26% for the S&P 500 and down 19% for SH which I am currently holding for clients. The same exercise with 2x Dow Jones (DDM), the Dow and 1x inverse down (DOG) doesn't track as closely as the S&P trio but it they're closer than you might think. 

As an advisor of retail sized clients, there's no reason to add the complexity of a 2x long S&P 500 ETF even if the idea was not to leverage up. In a 60/40 portfolio, a 30% weighting to SSO would in theory equal a 60% weight to equities, opening the door to some sort of of capital efficient portfolio even if that just meant sitting in cash. For other investor segments it might make sense, especially now that there are funds with longer hold periods. 

And we'll close with a change in fund strategy from Bitwise. It looks like they changed BITC from optimizing the futures curve to a trend following strategy. It's now called the Bitwise Trendwise Bitcoin and Treasury Rotation Strategy ETF. When Bitcoin is in a favorable trend it will own Bitcoin and when Bitcoin is trending lower it will own treasuries. The signal it will follow will be a "proprietary signal based on the 10 day exponential moving average (EMA) and the 20 day EMA of Bitcoin."

I would imagine the process would involve some sort of crossover of the 10 day and 20 day which is a short term signal but it will be interesting to see if 10 and 20 day EMAs will be fast enough for this fund to add value. 

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.

Done In By Misusing Leverage

Two quick hits.

Posted to Bluesky by Sean Brodrick.

Part of the story obviously is that there are now dozens of leveraged ETF versus a handful the further you look on that chart from right to left. This is an indication of some form of excess even if we can't precisely nail it down. 

That people are speculating with leverage on 2X Microstrategy, Nvidia and Tesla ETFs won't be the thing that causes the music to stop but they will mark the era when and if things go bad with this. If you put 3% into Ariba Networks into a diversified portfolio in 2000 or bought a house you could comfortably afford in 2007 then you had a setback but weren't blown up. 

I posted the above joke on Bluesky a few days ago. This person will get blown up if anything bad ever happens, absolutely destroyed. We talk frequently about leveraging down or using leveraged funds to set cash aside which is a different thing than leveraging up. It's not the use of leverage that hurts people, it is the misuse of leverage that hurts people. 

Here's an email from a mutual fund company where the fund tries, and generally succeeds, to be a horizontal line that tilts upwards.

Here's the text of the email.

The name of the fund doesn't matter, so I removed it. The content is almost something I would write. The T Rowe Price Total Return a little less so but the chart makes a point I've been making for ages about bonds. I think the top line on the chart, the purple line, is what people think bonds do. The other lines show the reality of what bonds actually do. If the correlation to equities is currently in a state of flux, that is to say the relationship between the two has become far less reliable, then I don't know why someone would want bonds with duration like the typical core bond fund has.

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.