Guest post by incogthrowawayofthed
Whenever I see someone bring up leveraged ETFs, the first responses I see are people saying you can’t hold them long term due to “beta/leverage decay.” Beta decay is really just another name for compounding. Beta decay is when a stock goes up 1% then goes down 1%, it’s lower than it started. This effect (compounding) is multiplied for leveraged ETFs for up, down, and sideways movement.
If you actually model how leveraged ETFs would have done in buy and hold historically, they perform exceptionally when held long term.
The reason that leveraged ETFs beat out this “beta decay” long term is obvious, historically the stock market goes up. So its upward movement gets compounded the most.
Below is what an investment of $100 invested on a certain date would have become by 12/29/2017 in either the S&P500 or UPRO (3x leveraged ETF of S&P500).
UPRO would have beaten the S&P500 in 49 of the past 58 starting years, usually significantly. And generally more significantly the longer the stocks were held.
| Invested $100 on This Date | S&P500 TR Amount on 12/29/17 | UPRO Amount on 12/29/17 | UPRO/SP500TR |
|---|---|---|---|
| January 1950 | $144,668.23 | $2,395,212.94 | 16.56 |
| January 1951 | $106,188.30 | $1,333,060.63 | 12.55 |
| January 1952 | $89,148.65 | $922,328.02 | 10.35 |
| January 1953 | $77,005.26 | $682,036.29 | 8.86 |
| January 1954 | $73,519.12 | $849,645.53 | 11.56 |
| January 1955 | $49,880.79 | $275,497.67 | 5.52 |
| January 1956 | $40,094.30 | $160,628.87 | 4.01 |
| January 1957 | $37,822.59 | $158,090.98 | 4.18 |
| January 1958 | $38,973.87 | $251,606.10 | 6.46 |
| January 1959 | $28,268.80 | $99,963.85 | 3.54 |
| January 1960 | $27,302.47 | $81,875.72 | 3.00 |
| January 1961 | $23,737.62 | $95,943.76 | 4.04 |
| January 1962 | $20,687.57 | $51,867.66 | 2.51 |
| January 1963 | $20,793.93 | $82,569.24 | 3.97 |
| January 1964 | $17,317.91 | $50,248.19 | 2.90 |
| January 1965 | $14,794.95 | $35,380.78 | 2.39 |
| January 1966 | $13,537.73 | $27,836.17 | 2.06 |
| January 1967 | $14,031.28 | $44,482.01 | 3.17 |
| January 1968 | $12,767.17 | $26,389.31 | 2.07 |
| January 1969 | $11,089.88 | $21,756.42 | 1.96 |
| January 1970 | $13,003.60 | $32,399.23 | 2.49 |
| January 1971 | $11,104.12 | $34,777.57 | 3.13 |
| January 1972 | $9,928.40 | $26,507.59 | 2.67 |
| January 1973 | $8,648.52 | $17,579.95 | 2.03 |
| January 1974 | $10,070.42 | $33,694.01 | 3.35 |
| January 1975 | $12,074.29 | $111,578.51 | 9.24 |
| January 1976 | $8,840.89 | $53,096.15 | 6.01 |
| January 1977 | $8,416.52 | $32,782.89 | 3.90 |
| January 1978 | $9,184.61 | $48,798.73 | 5.31 |
| January 1979 | $7,789.72 | $49,745.46 | 6.39 |
| January 1980 | $6,471.15 | $36,617.23 | 5.66 |
| January 1981 | $5,423.51 | $20,052.64 | 3.70 |
| January 1982 | $5,544.84 | $28,918.64 | 5.22 |
| January 1983 | $4,343.34 | $21,234.43 | 4.89 |
| January 1984 | $3,698.29 | $13,994.54 | 3.78 |
| January 1985 | $3,214.09 | $14,211.76 | 4.42 |
| January 1986 | $2,617.14 | $7,309.93 | 2.79 |
| January 1987 | $1,955.55 | $5,219.60 | 2.67 |
| January 1988 | $2,040.22 | $7,724.25 | 3.79 |
| January 1989 | $1,685.81 | $5,987.63 | 3.55 |
| January 1990 | $1,472.79 | $3,086.27 | 2.10 |
| January 1991 | $1,358.76 | $4,110.74 | 3.03 |
| January 1992 | $1,107.46 | $2,183.01 | 1.97 |
| January 1993 | $992.85 | $1,981.77 | 2.00 |
| January 1994 | $887.25 | $1,661.53 | 1.87 |
| January 1995 | $882.57 | $1,804.81 | 2.04 |
| January 1996 | $636.48 | $767.08 | 1.21 |
| January 1997 | $503.77 | $463.20 | 0.92 |
| January 1998 | $388.63 | $229.41 | 0.59 |
| January 1999 | $301.17 | $128.85 | 0.43 |
| January 2000 | $271.52 | $83.72 | 0.31 |
| January 2001 | $273.99 | $134.71 | 0.49 |
| January 2002 | $326.75 | $236.62 | 0.72 |
| January 2003 | $424.44 | $645.75 | 1.52 |
| January 2004 | $314.25 | $351.28 | 1.12 |
| January 2005 | $296.91 | $283.32 | 0.95 |
| January 2006 | $268.99 | $269.34 | 1.00 |
| January 2007 | $234.89 | $190.56 | 0.81 |
| January 2008 | $240.45 | $185.70 | 0.77 |
| January 2009 | $391.99 | $1,286.34 | 3.28 |
| January 2010 | $290.13 | $826.83 | 2.85 |
| January 2011 | $240.84 | $632.15 | 2.62 |
| January 2012 | $231.09 | $743.26 | 3.22 |
| January 2013 | $197.89 | $539.26 | 2.73 |
| January 2014 | $162.85 | $258.88 | 1.59 |
| January 2015 | $142.57 | $194.46 | 1.36 |
| January 2016 | $143.52 | $215.03 | 1.50 |
| January 2017 | $119.56 | $167.45 | 1.40 |
I even gave the S&P500 advantages, I assumed there was no expense ratio to track it, but I included UPRO’s expense ratio in its calculations. I included dividends for the S&P500 but I assumed UPRO never gave dividends (it does give dividends, just not consistently.) So in reality UPRO would beat the S&P500 by even more than I showed above.
If you think leveraged ETFs will be worse in the future than they would have been historically, you’re assuming the stock market will radically change compared to how it behaved historically, in one or both of the below ways.
1) You think the stock market will get SIGNIFICANTLY more volatile over the next 40 years compared to how it was over the past 60 years.
2) You think the stock market will on average go up significantly less than in the past. Though this is probably saying more or less the same thing as 1, you’re saying there will be more sideways and downward movement as opposed to upward movement, in other words more volatility.
I used th sp500 closing price over the past 58 years. I used that method for all years, including the years upro actually existed, so for the years upro existed you can compare it to my numbers above to see the tracking error. All my calculations assume you invest on the 1st trading day of January. If you compare my results to upro you’ll see the tracking error is not huge.
Disclaimer: This is a guest post and it doesn’t represent the views of IWB.
Disclaimer: Consult your financial professional before making any investment decision.