I am wondering if it a good idea to take maybe 10-15% of long term porfolio holdings and buy SPXL if markets drops little more. I am thinking about buying it if sp500 drops below 3000. I would start DCA with spxl when sp500 hits around 2900 . How does SPXL behave when price stays at around 2400 levels for 1-2 yers. Would it dacay or just stay the same. Good or stupid idea? Thank you
First of all, there's a question of timing your long term purchase. I'm not going to comment on that piece. I'm sure you'll get plenty of opinions on that soon enough. All of these leveraged (and even unleveraged) ETFs that reset daily have the same fundamental characteristics: they decay faster than the index they "track" (after factoring out the impact of their leverage) when there is a lot of volatility and they outperform when there is low volatility (and the direction also has to be in your favour, of course). So, for a long term trade, you are actually making a bet both on the direction and on future volatility. Incidentally, this is related to the concept of optimal re-balancing frequency of a portfolio: these ETFs essentially use an extreme re-balancing rule that can work in your favour or against you. Parenthetically, I spent several months analyzing these products to see if I could squeeze some alpha out of simultaneous long/short positions among certain combinations of them at specific times. (This is one of the types of trading I specialize in, using statistical models.) There was something there, but unfortunately, the short fees were too high and unpredictable for it to be a practical approach and I abandoned it. If you are making a short term trade, you can get a lot of extra "juice" with the leverage, but that's not what you're asking about. If you haven't already done so, I would recommend spending a little time analyzing the characteristics of daily re-balancing ETFs in a simple excel spreadsheet (or more powerful software if you prefer). Just start with a column of daily SPY prices. Then construct for yourself what a 1x (no leverage) daily rebalanced ETF would have done. Look at the periods where it outperformed, the periods where it underperformed and why. Then do the same for a 2x / 3x daily rebalanced ETF. Then look at the inverses. You should notice some interesting things. Once you've got that down, then you can create your own theoretical "SPY" prices based on returns and volatility that you set and see how the daily rebalanced ETFs would have behaved. I recommend this theoretical sandbox approach to complement simply looking at historical performance of various ETFs. Edit: To more directly answer your question, how SPXL will behave if the SP500 sits at a specific level for 1-2 years almost entirely depends on the volatility during that period. If there is sufficient volatility, it will decay. In fact, under the right circumstances, SPXL and SPXU will both decay simultaneously. This is part of the reason I suggest modeling the behaviour of the various ETFs, as outlined above: you can start to ask more nuanced "what-if" questions and see what would happen over a range of scenarios of interest.
What ST said. The tracking is always off day to day. I think there are better ways to track, longer term, an index and get leverage . The 2x-3x ETFs are good tools for short term trades. The base calculations are easy. Then applying them to a variety of scenarios and time frames takes a bit more time. Last time I looked at it, over 5 days is about the limit and where I switch to other instruments. It is good you are asking the questions and doing the research.
I remember reading somewhere that the optimal leverage is 1.8X. I believe that was based on backtesting of a theoretical 3X ETF going back to 2000 on the SPY. Of course its entirely dependent on the volatility since massive drawdowns will destroy returning to the starting point see for example the 3X Energy & Gold Miner ETFs (JNUG ERX) that Direxion had to convert to 2X since they almost went to zero in March 2020. I looked at a recent example of the SPY going nowhere for about 2 years. The period from 6/30/2014 to 6/20/2016 SPY was up 2.49%, UPRO (Proshares) was up 2.52% and SPXL (Direxion) was up 2.31%. So you lost about 5% if the 3X held up. It was essentially a 1:1 return. SPY would of course be better not to mention the 2 years of dividends you forgo. The 2X SPY ETF SSO was up 5.32% in the same time period so it actually performed better that the SPY. Of course the volatility was only +/-7%.
If I was trying to do this, I would consider futures. Just for fun, I pulled up some ES data. It looks like ES Sep 2022 is around 3683, Sep 2023 is around 3759, and the index is around 3666. Let's take Sep 2023 just to get in the ballpark of OP's original time scale. It's trading at a ~2.5% premium to the index. Presumably this wouldn't be an issue for OP since he's speculating for a large capital gain. With my non-portfolio margin IB account, this contract requires 16K-25K margin (depending on initial vs maintenance and intraday vs overnight). Let's call it 25K, which is the overnight initial margin. Of course different brokers offer different margin, etc, but this is just to give a ballpark sense for someone who doesn't have their own numbers to work with. 1 contract of ES controls 50x3759 = ~$190K notional. (Sorry @Overnight!) So, let's suppose your account is $1M and you want to the "equivalent" of putting the whole thing into a 3x SP500 ETF. (It's not actually equivalent, for the reasons discussed earlier.) Then, that means you want ~ $3M notional. $3M / 0.2M = 15 contracts. 15 contracts requires ~ 15x25K = $375K margin. Done. Buy 15 contracts and you'll basically get the equivalent of 3x leverage on SP500 based on your full account value. No discussion here of margin calls, etc. Occasionally I read scary posts on ET that reveal some people trade things they don't understand well enough and get themselves into trouble. If that could be you (not OP but "you" the reader) then don't just assume this post is the end of the story and please go learn more before you risk your capital.
*shakes fist at ST. Damn you!* As an aside, there's pretty much no way to get a fill on that Sep '23 contract. You could put a bid/ask out there 50 or 100 points above/below the settlement and you'd still prolly not get a fill.
LOL. Fair enough on the fill. I don't trade that far out and have no clue about the practicalities on this.