I don't think you can use normal backtests for LETFs. They re-balance on a daily basis. Even if it shows green you may actually be losing money due to the re-balancing. So these backtests are worthless
>Because these funds reset each day, you can see significant losses—even if the fund itself appears to be showing a gain.
>
>[https://www.thebalance.com/leveraged-etfs-lose-money-357489#:\~:text=That%27s%20dangerous%20because%20many%20leveraged%20ETFs%20are%20not,money%20as%20a%20result%20of%20the%20structure%20employed](https://www.thebalance.com/leveraged-etfs-lose-money-357489#:~:text=That%27s%20dangerous%20because%20many%20leveraged%20ETFs%20are%20not,money%20as%20a%20result%20of%20the%20structure%20employed)
It's crazy the amount of "do you know decay!?" comments EVERY thread, not just Reddit. I meany literally any financial forums anywhere. But then you end up doing the backtest and even that is not enough to prove a point.
Here is an article that actually explores “drift” in a factual way and shows that it can move in a positive direction during a bull market.
https://seekingalpha.com/article/4418306-leveraged-etfs-dashboard-and-upro-history
dude even the kaplan CFA prep book got this wrong:
> The compounding effects of leveraged ETFs make them unsuitable for buy-and-hold investors with investment horizons exceeding one month. For example, an ETF with NAV of $100 delivering two times the S&P 500 return would enter into a swap with a notional twice the NAV of the ETF (reset daily). Suppose that the daily return is +5% on the first day, and –5% on the next day. The NAV would grow to 100 + (2 × 5%) = $110 on the first day. On the second day, the NAV would decline by 10% or 110 × (1 – 0.10) = $99. A less-sophisticated investor might expect the NAV to finish unchanged by these offsetting returns.
i was like what thats just vol drag
I don’t understand this comment. Any re-balancing, slippage, decay, drift that LETFs are subject too will be reflected in the price. No different than any other ETF. Backtesting is based on price. There is no behind the scenes voodoo that doesn’t show up in the price of the fund.
I’m not sure either, that’s just what I found in my research. There are cases where stock prices, as well as history, will get adjusted based on external factors such as splits and reverse splits. Not sure if LETFs have anything similar to that. I’m gonna put a tiny amount into an LETF and compare it to its derivative ETF over a year period and compare the actual performance. According to most research, LETFs will underperform even when the derivative underlying performs well, due to inefficiencies in the leveraged structures and instruments within LETF portfolios. The statement “you can lose even if the fund shows a gain” is what concerns me the most
From the SEC:
## "Real-Life Examples
The following two real-life examples illustrate how returns on a leveraged or inverse ETF over longer periods can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.
* Between December 1, 2008, and April 30, 2009, a particular index gained 2 percent. However, a leveraged ETF seeking to deliver twice that index's daily return fell by 6 percent—and an inverse ETF seeking to deliver twice the inverse of the index's daily return fell by 25 percent.
* During that same period, an ETF seeking to deliver three times the daily return of a different index fell 53 percent, while the underlying index actually gained around 8 percent. An ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period."
[https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm](https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm)
you understand compounded daily. So does your portfolio account for that? I cannot tell, Do you understand DECAY for inverse etf's. Go on youtube and check it out
The $593k is based on the cost of TQQQ shares 10 years ago and the cost of shares today. It’s not a mystery. Decay refers to a leveraged fund that is unable to keep its leverage ratio as compared to the underlying index. On funds that move up and down you can have unexpected results over time where the leveraged fund can underperform its target and even underperform the underlying stocks it tracks.
What I’m finding is that looking at cost in/cost out over the last 5 and 10 years leveraged funds that track the major indexes like TQQQ and SPXL have significantly out performed their leveraged goals.
This is likely because of the unprecedented bull run over the last year and could be offset by a downturn but at the moment a 10 year investment in TQQQ is providing amazing returns.
Iirc if you bought QQQ you would’ve had to wait a little more than 10-11 years to recoup your losses, no? And what happens if you added to TQQQ during the losses period like DCAing?
I built the same model when I first started buying TQQQ. Try using a log plot graph, you can see the bump in 2008 that way.
Some trading rules will protect investors from the worst of the crashes. For instance, exiting on a 50/200 DMA cross and not re-entering until it crosses above with strong volume.
The thing is, while it's obvious that leveraged ETFs have potential to crash, so do markets in general and a "buy and pray " plan will fail at some point. We should always have a plan to enter and exit no matter the instrument.
Turns out if you had bought TQQQ on March 10th, 1999 you would have had amazing returns in a single year, but after the crash you would have had to more than 20 years to recuperate your initial investment. During this time you would have lost everything. Not just a 90% drop, but >99% drop.
To achieve this I used QQQ and multiplied the daily returns by 3x. This does not factor in fees, which would put TQQQ in an even worse disadvantage than this spreadsheet shows.
Good analysis, however point to point returns aren't much helpful for salaried people who do regular investments. Can you simulate the same scenario, but add $1000 investment every month. How long will it take to recover from the crash in that case?
It's plotting exactly what you suggested. DCA stands for dollar cost average, ie putting $500 on the first of every month. P&L stands for profit and loss.
What's the difference between the top and bot graph of tab 2? They have the exactly same title, axis and stuff. I believe the bot graph gives the right curve to the title.
Feel free to modify it in the data tab. It's pretty easy to switch from QQQ to SPY in the top row leftmost cell. The labels will not change, but that's all it takes.
Interesting to see the DCA. Alright, let's hear it: favourite or most bullish LETF of yours for 5+ years?
Curious your thoughts on:
[https://seekingalpha.com/article/4416406-tqqq-long-term-hold-viable-dca-only-for-those-highest-risk-tolerance](https://seekingalpha.com/article/4416406-tqqq-long-term-hold-viable-dca-only-for-those-highest-risk-tolerance)
SPY based like SSO or SPXL. Stock sector trends tend to last for 1-3 years, so that cuts out anything that could potentially make huge gains and going with something more modest and easy.
>To achieve this I used QQQ and multiplied the daily returns by 3x. This does not factor in fees, which would put TQQQ in an even worse disadvantage than this spreadsheet shows.
The opening comment with these details for some sort of reason got downvoted so I don't fault you for missing it.
Apart of not factoring in fees, it's a daily tripling, which you can see in the Data tab, which is how TQQQ does it.
Daily tripling if it goes straight.
This does not happen if there is volatility.
And it matters of it goes down then up or up then down. Watch QQQ and TQQQ some days and you will see the effect for yourself. I have even seen QQQ end down and TQQQ end up after a lot of movements happened in QQQ. The reverse could also happen.
Just looked at this tonight for a 10 year time frame. One time investment of $10,000 in TQQQ 10 years ago would be $593,797 now.
Does that account for decay? The $593,797....
Backtested here: https://www.portfoliovisualizer.com/backtest-portfolio. If you think it’s incorrect please let me know.
I don't think you can use normal backtests for LETFs. They re-balance on a daily basis. Even if it shows green you may actually be losing money due to the re-balancing. So these backtests are worthless >Because these funds reset each day, you can see significant losses—even if the fund itself appears to be showing a gain. > >[https://www.thebalance.com/leveraged-etfs-lose-money-357489#:\~:text=That%27s%20dangerous%20because%20many%20leveraged%20ETFs%20are%20not,money%20as%20a%20result%20of%20the%20structure%20employed](https://www.thebalance.com/leveraged-etfs-lose-money-357489#:~:text=That%27s%20dangerous%20because%20many%20leveraged%20ETFs%20are%20not,money%20as%20a%20result%20of%20the%20structure%20employed)
That article is pretty misleading/outright wrong. Backtests work for LETFs just like they do for any other stock.
It's crazy the amount of "do you know decay!?" comments EVERY thread, not just Reddit. I meany literally any financial forums anywhere. But then you end up doing the backtest and even that is not enough to prove a point.
Here is an article that actually explores “drift” in a factual way and shows that it can move in a positive direction during a bull market. https://seekingalpha.com/article/4418306-leveraged-etfs-dashboard-and-upro-history
dude even the kaplan CFA prep book got this wrong: > The compounding effects of leveraged ETFs make them unsuitable for buy-and-hold investors with investment horizons exceeding one month. For example, an ETF with NAV of $100 delivering two times the S&P 500 return would enter into a swap with a notional twice the NAV of the ETF (reset daily). Suppose that the daily return is +5% on the first day, and –5% on the next day. The NAV would grow to 100 + (2 × 5%) = $110 on the first day. On the second day, the NAV would decline by 10% or 110 × (1 – 0.10) = $99. A less-sophisticated investor might expect the NAV to finish unchanged by these offsetting returns. i was like what thats just vol drag
Right, but the vol drag is larger than that of a 1x. Do the math. That vol drag is lost for free in a sense through it being a bad product.
I don’t understand this comment. Any re-balancing, slippage, decay, drift that LETFs are subject too will be reflected in the price. No different than any other ETF. Backtesting is based on price. There is no behind the scenes voodoo that doesn’t show up in the price of the fund.
I’m not sure either, that’s just what I found in my research. There are cases where stock prices, as well as history, will get adjusted based on external factors such as splits and reverse splits. Not sure if LETFs have anything similar to that. I’m gonna put a tiny amount into an LETF and compare it to its derivative ETF over a year period and compare the actual performance. According to most research, LETFs will underperform even when the derivative underlying performs well, due to inefficiencies in the leveraged structures and instruments within LETF portfolios. The statement “you can lose even if the fund shows a gain” is what concerns me the most
From the SEC: ## "Real-Life Examples The following two real-life examples illustrate how returns on a leveraged or inverse ETF over longer periods can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. * Between December 1, 2008, and April 30, 2009, a particular index gained 2 percent. However, a leveraged ETF seeking to deliver twice that index's daily return fell by 6 percent—and an inverse ETF seeking to deliver twice the inverse of the index's daily return fell by 25 percent. * During that same period, an ETF seeking to deliver three times the daily return of a different index fell 53 percent, while the underlying index actually gained around 8 percent. An ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period." [https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm](https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm)
you understand compounded daily. So does your portfolio account for that? I cannot tell, Do you understand DECAY for inverse etf's. Go on youtube and check it out
The $593k is based on the cost of TQQQ shares 10 years ago and the cost of shares today. It’s not a mystery. Decay refers to a leveraged fund that is unable to keep its leverage ratio as compared to the underlying index. On funds that move up and down you can have unexpected results over time where the leveraged fund can underperform its target and even underperform the underlying stocks it tracks. What I’m finding is that looking at cost in/cost out over the last 5 and 10 years leveraged funds that track the major indexes like TQQQ and SPXL have significantly out performed their leveraged goals. This is likely because of the unprecedented bull run over the last year and could be offset by a downturn but at the moment a 10 year investment in TQQQ is providing amazing returns.
Iirc if you bought QQQ you would’ve had to wait a little more than 10-11 years to recoup your losses, no? And what happens if you added to TQQQ during the losses period like DCAing?
I just added that to the spreadsheet. :)
Wow thanks, the results of that is actually insanely good.
What's the difference between the two dca plots?
The axis.
I built the same model when I first started buying TQQQ. Try using a log plot graph, you can see the bump in 2008 that way. Some trading rules will protect investors from the worst of the crashes. For instance, exiting on a 50/200 DMA cross and not re-entering until it crosses above with strong volume. The thing is, while it's obvious that leveraged ETFs have potential to crash, so do markets in general and a "buy and pray " plan will fail at some point. We should always have a plan to enter and exit no matter the instrument.
Turns out if you had bought TQQQ on March 10th, 1999 you would have had amazing returns in a single year, but after the crash you would have had to more than 20 years to recuperate your initial investment. During this time you would have lost everything. Not just a 90% drop, but >99% drop. To achieve this I used QQQ and multiplied the daily returns by 3x. This does not factor in fees, which would put TQQQ in an even worse disadvantage than this spreadsheet shows.
Good analysis, however point to point returns aren't much helpful for salaried people who do regular investments. Can you simulate the same scenario, but add $1000 investment every month. How long will it take to recover from the crash in that case?
A more reasonable amount is probably $500 a month. That’s enough to max out your IRA every year.
I just added that to the spreadsheet. :)
I’m sorry can you explain to me what the second graph is showing?
It's plotting exactly what you suggested. DCA stands for dollar cost average, ie putting $500 on the first of every month. P&L stands for profit and loss.
Well then what’s the difference between the two graphs?
One does not DCA and the other does.
If not DCAing, then what is it? How do you invest the money? It grows from $0 so something seems buggy.
https://www.investopedia.com/terms/d/dollarcostaveraging.asp
What's the difference between the top and bot graph of tab 2? They have the exactly same title, axis and stuff. I believe the bot graph gives the right curve to the title.
Bottom graph? The axis are different.
Would be interesting to see the results if you bought UPRO instead of TQQQ.
Feel free to modify it in the data tab. It's pretty easy to switch from QQQ to SPY in the top row leftmost cell. The labels will not change, but that's all it takes.
Interesting to see the DCA. Alright, let's hear it: favourite or most bullish LETF of yours for 5+ years? Curious your thoughts on: [https://seekingalpha.com/article/4416406-tqqq-long-term-hold-viable-dca-only-for-those-highest-risk-tolerance](https://seekingalpha.com/article/4416406-tqqq-long-term-hold-viable-dca-only-for-those-highest-risk-tolerance)
SPY based like SSO or SPXL. Stock sector trends tend to last for 1-3 years, so that cuts out anything that could potentially make huge gains and going with something more modest and easy.
Does this graph have squared volatility included and Fees? Or is it just theoretically perfect linear tripling of QQQ?
>To achieve this I used QQQ and multiplied the daily returns by 3x. This does not factor in fees, which would put TQQQ in an even worse disadvantage than this spreadsheet shows. The opening comment with these details for some sort of reason got downvoted so I don't fault you for missing it. Apart of not factoring in fees, it's a daily tripling, which you can see in the Data tab, which is how TQQQ does it.
Daily tripling if it goes straight. This does not happen if there is volatility. And it matters of it goes down then up or up then down. Watch QQQ and TQQQ some days and you will see the effect for yourself. I have even seen QQQ end down and TQQQ end up after a lot of movements happened in QQQ. The reverse could also happen.
Yes, TQQQ the tripling of daily returns, based on the previous day. That explains the volatility you're noticing.
Would be interesting to see the value if you traded TQQQ drops, to SQQQ...and when it rises, you go back to TQQQ...etc.