You absolutely do not want to own upro for 5 years. High fees and more importantly beta-slippage will eat you alive.

by beta slippage you mean volatility drag? On a risk adjusted basis, upro is definitely a loser due to volatility drag and high expense ratio. However, you can easily calculate optimal leverage ratio in order to maximize the geometric growth of your portfolio. The equation is:

lev = E(r) / Var(r)

So if the expected return is 10% and the expected volatility is 10%, optimal leverage to maximize geometric growth is 10x.

This of course is much too high and the risk of losing everything due to excessive kurtosis and downside skew is very high. Like the everything else in finance, fundamental sin of that formula is assumption of the log normality of returns.

However, is 3x too high for the long term? I dunno, but over long time periods, a pure 3x leveraged spy portfolio is going to outperform significantly. The problem is most people will be unable to weather the storm as you can easily lose half of your money in a week.

I wouldn't hold pure spy 3x and wouldn't exactly recommend it, but from a mathematical perspective it is a defensible (as in, you can make cogent arguments for it) long term investment.

On the other hand, I would probably recommend 1.5x lev or possibly even 2x lev to certain people.

As a quant, I approach these things like leverage from a mathematical perspective. It's important not to have an emotional reaction. There are very smart people running books that have 10x leverage but you would never be able to guess by looking at their volatility. It's all about the factor exposures, net delta, etc.

For example I've seen 15x leveraged delta neutral books that have absolutely insane Sharpe ratios (>15) and annualized volatility of less than 5%.

> However, is 3x too high for the long term? I dunno, but over long time periods, a pure 3x leveraged spy portfolio is going to outperform significantly. The problem is most people will be unable to weather the storm as you can easily lose half of your money in a week.

You don't define "long time periods" but the storm may be much longer than one week.

If you had invested with 3x leverage (daily rebalanced) in the S&P 500 anytime in 1999 or 2000 you would have been down over 90% in 2009 and you wouldn't have broken even until 2014 or 2016.

Well you would have done just amazing (as I pointed out) over the last 5 years. Better than 3x the S&P 500.

I'm not saying you don't have a point, but one would need to look at how it performs over longer periods with more varied market conditions to answer your question.

It depends a lot on the period (and I think you didn't include dividends?).

  1 year:   SPY  +15%  -  UPRO   +2%
  3 years:  SPY  +37%  -  UPRO  +33%
  5 years:  SPY +110%  -  UPRO +325%

Since 2016 is in line with the x3 promise. Since 2018 or 2020 definitely not.

Good catch, I forgot dividends.

Interesting that the last year performance was so bad - I think that stock market drop back in March and the general volatility / reshuffling since then must have hurt the leveraged strategy.

UPRO is only 1/3 of your portfolio, so you have the same exposure as SPY i.e: you are not going to make those crazy returns.

The idea is to get cheap borrowing by using a leverage ETF and then buying bonds such that the bond yield > cost of leverage.

You're arguing against a strawman argument that you invented.

I didn't say you would get those crazy returns - merely pointed out that you would have beat the S&P 500 over the last 5 years with the strategy outlined by the parent post.

How well it holds up over a time period that also includes bear markets is another question - you can't just look at a bull market and assume it's representative of all time.

Isn't UPRO just a leveraged SPY. Seems different to the above option selling strategy

You must have skipped over and didn't read the parent post at all. We're not talking about the wheel strategy here.