Use SPYU's 4x Leverage Tactically To Boost Your Portfolio's Risk/Reward Substantially

seekingalpha06-26

You've likely heard of 3x Leveraged ETFs - welcome to SPYU, the first 4x levered ETN that tracks the S&P 500.The extreme leverage employed by this fund immediately disqualifies it as a long-term ...

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The thrust of the article was that the fu","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4581":"高盛持仓","SH":"标普500反向ETF","BK4504":"桥水持仓","SSO":"两倍做多标普500ETF","OEF":"标普100指数ETF-iShares","SPXU":"三倍做空标普500ETF","BK4585":"ETF&股票定投概念","VOO":"Vanguard标普500ETF","BK4534":"瑞士信贷持仓","SPY":"标普500ETF","UPRO":"三倍做多标普500ETF",".SPX":"S&P 500 Index","BK4559":"巴菲特持仓","OEX":"标普100","BK4588":"碎股","BK4550":"红杉资本持仓","SPYU":"MAX S&P 500 4X Leveraged ETN","IVV":"标普500指数ETF","SDS":"两倍做空标普500ETF"},"translate_title":"战略性地使用SPYU的4倍杠杆来大幅提高您投资组合的风险/回报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"OEF":0.6,"VOO":0.6,"UPRO":0.6,"SSO":0.6,"SPYU":0.6,"SPY":0.6,"SPXU":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,".SPX":0.6,"IVV":0.6,"ESmain":0.6},"content_text":"You've likely heard of 3x Leveraged ETFs - welcome to SPYU, the first 4x levered ETN that tracks the S&P 500.The extreme leverage employed by this fund immediately disqualifies it as a long-term investment vehicle due to the potential for permanent capital impairment.However, the built in volatility is interesting from a portfolio construction standpoint.Today, we design a strategy using SPYU that could potentially outperform the market by more than double, while removing risk at the same time.   We Are Last week, we wrote an article about TQQQ, the ProShares UltraPro QQQ ETF, titled: \"TQQQ: Two Ways To Tame The Volatility And Capture Far More Upside\". The thrust of the article was that the fund was likely a good way to capture broader appreciation in the market over the long haul, IF, and only IF, one was willing to position tactically, reacting to changing market conditions to prevent massive drawdowns and other nasty surprises. The core strategy we suggested was buying and holding TQQQ when the underlying index, the Nasdaq 100, was above its 200-day moving average. When below this average, we suggested selling out of TQQQ and moving into short term cash / bills. Over time, this has historically resulted in significantly less volatility and a lower drawdown than holding TQQQ alone, and with significantly more upside than the buying and holding the vanilla market:   Composer.Trade Today, we wanted to explore a distant cousin of TQQQ - MAX S&P 500 4X Leveraged ETN (NYSEARCA:SPYU). This note, the MAX S&P 500 4X Leveraged ETN, is similar to TQQQ in that it has a unique and somewhat problematic risk profile. AKA, there is a LOT of risk inherent to this product that makes it a poor vehicle for 'set and forget' investing. However, as the only '4x' 'LETF' on the market, we wanted to discuss a few strategies that you can use to make the most of this extremely volatile instrument. Sound good? Let's jump in. How SPYU Is Constructed Before we dive in to building a strategy that takes advantage of the unbelievable volatility profile of this fund, it's important to first understand how the ETN works. In short, SPYU purchases leveraged derivatives and OTC swaps from leading banks that mimic a leveraged position in the underlying index. Then, the fund rebalances once daily to keep this position in line. It's very hard to find this fund's exact current holdings information, but in theory (and as laid out by the prospectus), we assume that it should look very similar to something like UPRO, which is a 3x daily return implementation of the same concept: ProShares As you can see, almost all of the exposure is focused on these top credit swaps from big banks. Again, this should be quite similar to what SPYU is holding, just at a higher overall level of gross exposure. Since inception, SPYU has returned 68%, which is slightly less than 4x the return of SPY over that time: TradingView This divergence is due to high funding costs for the employed leverage, as well as a concept known as beta erosion that we'll talk about later in the risks section. It's important to note that the fund isn't meant to track SPY's return 4x over all time frames, only 1 day at a time. If volatility is high, then this doesn't translate to longer term leveraged performance mirroring. However, it's clear that the fund has the enhanced vol profile discussed at the beginning of the article. How can we take advantage of this unique level of leverage? Building A Proper SPYU Strategy For Optimal Results The fund is clearly volatile, which, again, brings a tremendous amount of risk into the picture, but also serious potential rewards if one can handle the swings. How should we move in and out of the fund tactically to capture the upside and remove downside? In our previous article, we recommended a simple TQQQ SMA strategy to optimize R:R, but today, it's important to go a bit deeper to construct a slightly more robust strategy that focuses on buying dips in the market. Why a buy-the-dip strategy? In theory, a 4x fund will have even deeper peak-to-trough long term drawdowns simply as a result of market fluctuations, and thus buying in at a good price (when things are 'oversold') matters more than ever. Let's start by creating a back test that buys SPY when the 14-day RSI dips below 30:   Composer.Trade This strategy ends up outperforming cash interest by a good deal, which is unsurprising: Composer.Trade Most of this underlying strategy's trades were profitable, especially around the crash in 2020. But what happens if we buy a leveraged instrument, like UPRO, instead of SPY? Even bigger gains. In fact, implementing this strategy results in a similar overall rate of return vs. the S&P 500 from 2016 through today, but with a much lower level of drawdown vs. the vanilla index: Composer.TradeComposer.Trade With a max drawdown of only 17%, this UPRO 'buy the dip' strategy ditches a considerable portion of the risk inherent to the typical indices for an almost identical rate of return. Not bad! Alright, there's one final improvement we can make. Right now, there's a significant amount of time that this 'Buy the dip' strategy is sitting in cash, which seems inefficient from a capital productivity perspective. Let's also add some vanilla SPY exposure when the index is both above 30% RSI and above the 200-day moving average. That logic chain looks like this: Composer.Trade And it results in performance metrics like this: Composer.TradeComposer.Trade When the market dips, the strategy buys UPRO tactically. Then, if it's not in UPRO, it's either in cash or SPY, depending on whether or not SPY is above the 200-day simple moving average. This strategy has a max drawdown of 22%, which is significantly less than the S&P 500 over that time, with more than double the annualized return. The best part is that this strategy isn't particularly well-fit, as there are not a lot of parameters to consider, and we haven't optimized the moving averages or RSI levels to come up with an optimal group of settings. Thus, we believe generally in its robustness moving forward. How does this all relate to SPYU? In our mind, this is the perfect type of strategy that one can use SPYU within. With more leverage, SPYU is the perfect instrument to use in the 'buy the dip' portion of this strategy, which could provide even more upside without a drastic increase in associated risk, given the lack of non-targeted exposure. The only reason we used UPRO in the examples above is because SPYU is a brand-new fund and hasn't traded live in the market long enough to illustrate our intent. When used in this way, as a tactical instrument, SPYU can provide investors an incredibly useful tool in the investing and trading toolkit, while avoiding the incredible associated risk that comes with passively allocating to such a product. Risks Let's take a look at some of those risks now. It may come as a surprise, but 4x products are not common, and SPYU is the first of its kind from an index perspective. Risk wise, this increased leverage profile basically just exacerbates all of the existing risks with leveraged products. There are a LOT of risks with holding this over the long term, chief among them beta erosion, which is the process by which an increase in volatility conditions across the market should lead to suboptimal returns, and even losses, no matter the direction of the market. First, as we recently described, performance path matters for cumulative returns over time:  Zooming out, chop damages leveraged strategies more than unleveraged ones, as you can see below. Here's a chart of performance for two separate instruments, one that uses leverage, and one that doesn't, both tracking the same thing: Author's CalculationsWhen prices don't move much, or chop up and down in a similar range, the leveraged strategy loses more as a result of pure percentage math.  Then, based on how the funds rebalance, they're always optimizing for streakiness. If things chop around, the fund will be rebalancing in the wrong direction at bad times. Here's a fantastic comment from user fsaldanha we saw on a recent article that explains this better than we ever could: Suppose you got $100, went to a bank, borrowed $300 at zero interest, and bought SPY shares. Suppose SPY went up 1% the next day. Now your investment is worth $404 - $300 = $104. Great! Suppose you want to stay 4X leveraged. But that would mean having a position worth $416, not $404. You have to go back to the bank and borrow another $12. That is how the managers of leveraged funds operate. As you can see, these funds are always 'pyramiding' their positions depending on how the fund recently did, which is great on a streak, but terrible in chop. The fund sponsors put together a chart that shows how increases in volatility, even in an 'up' market, can lead to losses over longer, non-tactical time horizons: Prospectus In the past, the indices have been sufficiently 'streaky' such that the 3x ETFs have outperformed the vanilla indices over time, but given a long period of chop, especially sideways volatility, and it's possible that a fund as highly levered as SPYU may not recover. QQQ went through a drawdown in 2022 and TQQQ was down more than 80%, and it still hasn't reached new highs despite QQQ doing so. This is a perfect example of this risk. Additionally, there are some risks associated with using SPYU even in the tactical way we described above. First, SPYU is a mostly untested product, which could lead to solvency / liquidity concerns. Volmageddon taught us this in 2018, and it could happen again here with this new ETN. We don't think this is likely given the 'tried and true' operating procedures of these leveraged funds, but it's something to be aware of. Also, even when used in a specific context like the strategy above, there's no promise that an oversold condition could ameliorate in such a short period of time. This could lead to an ill-timed buy into SPYU that loses a significant sum and impairs capital over the long term. A big loss event like this didn't show up over the last 9 years in the back test, but it's possible that 2001 or 2008 could have triggered something like this to occur. Plus, there's always a black swan around the corner which could throw things into disarray, of which it's likely that leveraged products will fare worse than most. Summary Overall, SPYU is a highly risky instrument, but the potential to use it tactically for gains is highly tempting. We've laid out our preferred SPYU strategy, but be keenly aware of the risks when investing in something like this.  Good luck out there!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2446398106"}