So here's what I'd like to do: Leverage 4x a bond ETF like MUB. For the sake of this discussion, I'd like to focus on the mechanics of doing this rather than the investment itself. What I've done so far: I bought MUB through a Reg-T account at ~1.9 leverage. Problem: As mentioned, I'd like to increase my leverage to 4x. This is not possible with Reg-T because margin is effectively 50%. Whereas I can do intraday trading at 25% (4x), I intend to hold the bond fund long-term so overnight margin of 50% applies; my leverage max is near 2x while having some margin cushion. What I'm considering: Looking at Portfolio Margin which is risk-based and where initial and maintenance margin may be 15-30%. Where I'm confused is that PM seems to reward portfolios- perhaps because different securities can be combined to lower volatility. What I want to know is that if I want to accomplish my purpose, would it be sufficient to simply opt for PM (with $110K minimum) and purchase MUB? My thinking is if I could get a PM margin % of 15% on this investment, I could safely 4x leverage and have margin cushion. When I used "Try Portfolio Margin" in IB TWS, it seemed to indicate the margin of PM would be similar to Maint Margin in Reg-T; or 25%. Since initial margin and maint margin are the same in Portfolio Margin, I took this to mean that MUB would get a PM% (and therefore including Initial Margin) of 25%. However, I would prefer it to be lower (closer to 15%) so I can do 4x and have margin cushion. I'm not sure why it would be so high given that this investment does not fluctuate very much at all (max of 3% loss for a calendar year in last 5 years; and had a 1% positive return in 2008). Need guidance from people with experience with IB Portfolio Margin.
You do know this trade is not going to make you any money right? IB is going to charge you 1.9% to lend the capital and there is a .25% management fee on the ETF. That's 2.15% a year in cost to earn the 2.28% divie. So you are willing to accept the downside risk of owning this for a mere 13 bips a year?
Use 1.9 leverage on HYD, which is a high yield muni etf. It tracks MUB reasonably closely but is far more volatile because it holds high yield muni bonds.
Maverick- "I'd like to focus on the mechanics of doing this rather than the investment itself." I may create a separate thread on the numbers, but for now simply want to understand PM on IB, and what's the likely initial margin for an investment like this (or how to find out). Clacy- thanks. I have some flexibility around the final portfolio.
Could there be a tax advantage in doing this? If the interest costs can be deducted but the income from the ETF is considered tax free (because it comes from munis), it might produce a benefit overall when other incomes are factored in (other sources of taxable interest income) I doubt this would work as the IRS is the king of closing out tricks like this but its something to explore
I think basically what you are asking/doing is: Use the leverage in your account to purchase an asset that gives a yield greater than the cost of borrowing. A real simple example: You borrow 100,000 USD from IB at 1.9% Use that to invest in GE with yield at 3% You pocket the 1.1% per year. The risks: You could get a margin call (if the asset or other assets in portfolio go down enough, depending on how you are structured). The dividend could be cut/stopped (in which case you are loosing 1.9% per year). The value of the stock could go down (which could put some temporary pressure if you were planning to liquidate). The cost of borrowing could go up. A legitimate bad scenario for the above: Yield gets cut to 2% Stock drops 25% --- You now no longer want to liquidate until it returns to the price you paid. Interest rates rise. After 5 years, GE still trading below what you paid for. After 5 years, the borrow rate has gone up to 4% You are now effectively loosing 2% (or 2000$) per year with no no-loss way out. So there is risk, but if you are careful and selective and understand the risks it can be managed.
One thing to consider with PM is that IB has a magic algorithm in a black box you can't access that determines what your margin should be and it may not stay constant once you buy the security. So while you may be able to get 4X if you have the right offsetting positions in your portfolio today, they might decide tomorrow that you only get 2X and then auto-liquidate your position at the worst price possible to get you down to the right margin. Or changes elsewhere in your portfolio might make a huge change in your max margin on the original security.
What Sig says is something I discovered when I looked into PM at IB. The calculation really is a mystery and is subject to change at the whim of IB which can result in a margin call, which means auto-liquidation at IB. It's a risk category unto itself ... maybe we should call it "Dynamic Black Box PM Risk"
Thanks all. I will continue this experiment and report back what I find. I will have the necessary amount (~110K) in IB by end of next week and will then know what the margin rate would be. I'll keep an eye out for the changing % (given the opaque formula) and see if I can get better clarity on it.
Did you end up finding a solution? I am trying to do something similar, along the lines of a risk parity type portfolio...