If you have constant leverage (for example like most constant-leverage ETFs) then you effectively multiply your arithmetic return by a constant and your volatility by the same constant so your new geometric return is:
There is a sense in which all three (leveraged-ETFs, margin, futures) are all equivalent, the main difference is in how active you need to be to maintain you need to maintain your strategy. In terms of “closest to buy-and-hold” I think they go in this order:
Margin (buy less than your broker allows you too, maintain cash in your brokerage, periodically adjust)
Futures (make sure you hold significantly more cash than your brokerage, roll your futures appropriately)
Leveraged-ETFs (hold cash to rebalance, you will need to do so regularly)
There is a sense in which they also go in the opposite order in terms of effort. (For example, if you do want to maintain constant leverage (which is of course the concrete recommendation for juicing returns) then leveraged ETFs are the way forward as tryactions explained)
Right, so the back of the envelope calculation for what I think you are calling volatility drag is:
geometric return = arithmetic return—volatility^2 / 2
If you have constant leverage (for example like most constant-leverage ETFs) then you effectively multiply your arithmetic return by a constant and your volatility by the same constant so your new geometric return is:
leverage * arithmetic return—leverage^2 *volatility^2 / 2
Your example is correct.
There is a sense in which all three (leveraged-ETFs, margin, futures) are all equivalent, the main difference is in how active you need to be to maintain you need to maintain your strategy. In terms of “closest to buy-and-hold” I think they go in this order:
Margin (buy less than your broker allows you too, maintain cash in your brokerage, periodically adjust)
Futures (make sure you hold significantly more cash than your brokerage, roll your futures appropriately)
Leveraged-ETFs (hold cash to rebalance, you will need to do so regularly)
There is a sense in which they also go in the opposite order in terms of effort. (For example, if you do want to maintain constant leverage (which is of course the concrete recommendation for juicing returns) then leveraged ETFs are the way forward as tryactions explained)