At its core, this High-Risk Strategy is a risk-parity strategy. Both funds in this strategy use a 3x leveraged ETF. A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. — Investopedia.com
For a 3x ETF, if the underlying index returns 1% on a given day, the fund would theoretically return 3%. Theoretical though, as management fees and transaction costs (which are high) diminish the full effects of leverage. However, after some through research, I’ve discovered that, on average, there’s around a 2.8x multiplier against the underlying assets.
But as with all things fueled by leverage and debt, there’s a catch — The 3:1 ratio works in the opposite direction as well. If the index drops 1%, the loss would then be 3%.
Assets in question:
It’s worth mentioning that these two funds are designed for day trading, or at least short term holding (few days to possibly weeks at most). So why am I recommending buying two of them?
Well the two in question are the following:
- UPRO – ProShares UltraPro S&P 500
- TMF – Direxion Daily 20+ Year Treasury Bull 3x Shares ETF
Of the two, 3x leveraged ETFs in this strategy, one of them acts as a hedge against the other – TMF (treasury bonds on steroids) will typically decrease a bit or hold its value while UPRO (S&P 500 on steroids) goes on a tear. The monthly correlation is generally around -21%. It may not sound like a huge negative correlation, but it’s enough to protect gains during downturns.
The idea with negatively correlated assets is to project against downturns, but sometimes even that isn’t enough, which is where risk parity comes into play.
What is risk-parity?
Every asset comes with its own level of return and inherent risk profile, risk parity allocates the portfolio by equalizing the risk contributions of each asset class without considering their expected returns. This has been showed to increase returns . But we can use an example to illustrate this; stocks are generally more risk than bonds are so occasionally around the time we rebalance, we’d want to look at risk parity and see if we are adequately protecting ourselves. Sometimes we would want to add more bonds, or sometimes more stocks. As we do these rebalances to our portfolio, we keep the risk we exposure ourselves to constant over time.
That is Risk Parity.
So, overtime we want to reevaluate our positions and determine the best and least volatile combination of assets. We’d be reevaluating our positions on a monthly basis and potentially rebalancing them as well. If volatility increases in the stock market then we’d move our new deposits or sell some of UPRO for TMF because with increased volatility there’s an implied increased risk of a downtown. But if the treasury bond market sees more volatility, we’d be purchasing more UPRO to counter act the volatility in the bonds market.
Once a month the strategy evaluates risk parity conditions and changing market variables and determines the appropriate allocation moving forward. Further, it looks at technical indicators to determine if we should hedge with more or less bonds – or increase risk with more UPRO.
But why should we be re-evaluating monthly and trading monthly?
Because holding UPRO has immense risk, we still could theoretically hold UPRO for a long period of time, rebalancing monthly as this helps offset the beta decay .
But this is not to say that there still aren’t huge risks. But the gains to be realized help are dramatic enough that these strategies in the high-risk department could supplement a good traditional retirement portfolio. Or be the backbone of your gambling fund.
Performance notes: The backtests have been stunning but please understand that past performance doesn’t mean future performance will be similar.
The Ultra High-Risk Strategy has a CAGR of 17.97% being back tested all the way to May of 1986. And since inception of these funds in February of 2010 for UPRO and April of 2009 for TMF, this strategy has a CAGR of 28.48%. But it comes with some risk as well, the historical backtest shows a max drawdown of -61.47% during the great recession. However, since inception of the funds, with TMF and UPRO, they have had a max drawdown of -26.19%.
We are using the S&P 500 as the benchmark for the High-Risk Strategy. And a 17.97%/28.48% CAGR out preforms the S&P500 by 7.42% since 1986, and since the inception of the funds, out preforms by 17.93%. Meaning, you’d be turning 10,000 dollars into 2.6 million or 1,000 dollars into $260,000.
And the Total Returns? Well UPRO and TMF have returned more than double their benchmarks – S&P returned 323.48%. While, UPRO and TMF returned 898.36% and 781.24% respectively.
Note: while the strategy fades higher-risk equity funds and increases allocation into the relative safety of bonds in the event of broad market downturns, nothing short of perpetually holding cash or cash ETFs will protect in the event of a flash crash or a sudden jolt to equity or bond markets.
That said, the pain from most market downturns (i.e. recessions, bursting bubbles, market corrections) can be mitigated by a strategy that can move to relative safety within weeks.
What you get:
Before the market opens on the last trading day of the month, you’ll receive a newsletter in an email detailing the same plan that I will be using in my portfolio. You’ll receive a quick market update about what has happened in the past month in regards to UPRO/TMF and a risk parity check with an update on the correct allocation to have.
Similarly, you’ll be receiving a newsletter that level one receives but it will improve performance with a signal to buy or sell positions based on market movements shown to increase returns with a CAGR of 20.41% backtested to 1986. There are plans to add a risk of failure calculation for these funds on this level – but I expect to be releasing this early next year in 2021.
Subscribers to both levels will gain access to the Members page, offering up more strategy details.
Level one for the High-Risk Strategy is $6.99 per month – you’ll get a news letter with market updates and a risk parity check, all for the price of a combo at McDonalds.
Level two is $13.99 per month – you’ll receive the newsletter from level one, a Buy/Sell signal bot with the monthly newsletter. With further, plans to add a risk of failure calculation.
First month is FREE. Don’t let your future pass you by. Go to the subscription page to SIGN UP.
Once you have signed up, please follow this link .
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 Recent papers suggest that leverage can enhance returns and reduce retirement risk. Unfortunately, not all option strategies are available in IRAs so using leveraged ETFs is an alternative to option usage. Ayres, Ian and Nalebuff, Barry, Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk (June 2008). NBER Working Paper No. w14094, Available at SSRN: https://ssrn.com/abstract=1149340
 Recent papers studying risk parity strategies include: Maillard, S., et. al. (2010), “The Properties of Equal-Weighted Risk Contribution Portfolios” (accessed from: http://jpm.iijournals.com/content/36/4/60), Chaves, et al. (2012)