Portfolio Heresy; Levered ETFs

I wanted to have a little more fun with portfolio construction comprised of ETFs that "no one should use." Funds that symbolize all that is wrong with our once great country! Too much? Yeah too much but still some interesting results. 

Below, leverages up the Permanent Portfolio. The plain vanilla of that portfolio puts equal 25% weightings into equities, gold, bonds with duration and cash with the idea being that no matter how bad things might get, at least one of those four will be doing well. 

Portfolio 1 just levers up the stocks, gold and bonds. Portfolio 2 has a little less leverage and adds client/personal holdings MERFX and BTAL to help manage volatility which helped during drawdowns even versus VBAIX. Portfolios 1 and 2 lagged VBAIX over the backtested period but were quite a ways ahead of the PRPFX mutual fund. I wouldn't call the results compelling but looking at the leveraged funds as underlying plus the volatility of the underlying changes the lens of how to view the levered funds and there was nothing calamitous about the blending of these funds even if any of the individual funds did have a calamity or two along the way. 

This second one is more compelling. It uses a lot of 3x funds.

Portfolio 1 has essentially the same growth rate at the S&P 500 with much less volatility and Portfolio 2 has essentially the same volatility with a noticeably better growth rate. Not surprising then that both have a better Sharpe Ratio than the S&P 500. The various drawdowns are a mixed bag in terms of the leveraged portfolios doing worse at times or doing better at times. 

I'm pulling these together just off the top with no real work here. If someone were to apply themselves to this they could probably come up with something a little more robust but it is clear to me that the levered funds simply have their drawbacks just like anything else, they are not the pure evil that some make them out to be.

Underlying plus the volatility of the underlying is a different return stream than just the underlying. The portfolios from yesterday and today add volatility as an asset class which it can be. If you believe the flaws of the levered funds are too much overcome for any reason then obviously you should not use them. Like I said yesterday, I don't plan on doing this but the levered funds we're working with appear to create valid portfolios when used a certain way and maybe we stumbled into that certain way.

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