As a follow-up: I did this for a while, but I’ve become convinced there are a couple effects that make this not as good as it sounds:
Futures have taxes paid in the year gains are made, which significantly reduces returns in simulations I’ve run. In an ETF or mutual fund, you can instead let those gains ride.
Futures have an implicit financing cost, and portfolio performance is very sensitive to this cost if you’re using a lot of leverage (e.g. for intermediate term bonds).
Leveraged ETFs fluctuate a lot, and need to be rebalanced with the rest of your portfolio. This causes taxes like above. If you don’t rebalance, your leverage ratio changes which causes the portfolio to behave poorly as well.
With all of these effects accounted for, the gains from leveraging look very modest and depend a lot on what time period you look at. Given the risks, I’ve decided against it for myself.
Given those findings, is the strategy feasible in tax-sheltered retirement account? My backtests indicate that quarterly rebalancing is usually sufficient, even with leveraged ETFs, but it’s still worth intervening sooner when vol gets high.
In a taxable account, does tax-loss harvesting to offset your short-term capital gains help? You would rotate among leveraged ETFs. You can also indirectly reduce exposure by hedging with a different ticker rather than realizing short-term gains by selling immediately. You can either short-sell or buy an inverse ETF. LEAPS are also an option (heh), but you have to remember to roll them.
As a follow-up: I did this for a while, but I’ve become convinced there are a couple effects that make this not as good as it sounds:
Futures have taxes paid in the year gains are made, which significantly reduces returns in simulations I’ve run. In an ETF or mutual fund, you can instead let those gains ride.
Futures have an implicit financing cost, and portfolio performance is very sensitive to this cost if you’re using a lot of leverage (e.g. for intermediate term bonds).
Leveraged ETFs fluctuate a lot, and need to be rebalanced with the rest of your portfolio. This causes taxes like above. If you don’t rebalance, your leverage ratio changes which causes the portfolio to behave poorly as well.
With all of these effects accounted for, the gains from leveraging look very modest and depend a lot on what time period you look at. Given the risks, I’ve decided against it for myself.
Given those findings, is the strategy feasible in tax-sheltered retirement account? My backtests indicate that quarterly rebalancing is usually sufficient, even with leveraged ETFs, but it’s still worth intervening sooner when vol gets high.
In a taxable account, does tax-loss harvesting to offset your short-term capital gains help? You would rotate among leveraged ETFs. You can also indirectly reduce exposure by hedging with a different ticker rather than realizing short-term gains by selling immediately. You can either short-sell or buy an inverse ETF. LEAPS are also an option (heh), but you have to remember to roll them.