For posterity’s sake: I became convinced this is practically doable (using either treasury futures, leveraged ETFs like NTSX, or maybe options which I don’t understand as well) and probably a good idea/not very dangerous if done correctly. I think that fact is slightly info-hazardous for a couple reasons:
You shouldn’t trust most people to correctly advise you on financial products, to not be delusional, or to have your best interests at heart. So it’s hard to figure out exactly what to do. Index funds overcome this problem through the sheer size of their giant pile of empirical evidence and expert consensus; basically everyone agrees that they work as advertised, and no one reports getting accidentally burned using index funds—except when the whole market crashes, where they behave as expected.
If you learn that it’s probably a good idea when done correctly, you might feel obligated to go do it, and then you might do it incorrectly and foreseeably lose a bunch of money.
Because the pile of empirical evidence is less giant, it might not turn out to be such a good idea in retrospect, so it’s fundamentally riskier (even taking into account the risks people calculate). I’m sure someone would argue the pile is giant, but even if true that’s probably only the case if you’re sufficiently expert to judge more obscure evidence piles which most of us are not.
So I’d STILL recommend you not do this unless you’re extremely curious in this area, have no hang-ups, feel competent and trust your own judgment around things like intimidating financial products, have no track record of unwise gambling behavior, and have a stable enough life that if you fuck up you won’t be in a bad situation.
Here’s some resources. If you’re not interested enough to read and enjoy stuff like this, probably avoid doing this:
I’m a big fan of NTSX and have done a bunch of back tests to see how it would have performed in various conditions. In all reasonably long time periods that I simulated, something like NTSX had lower volatility and higher return compared to SPY. About a year ago I went ahead and replaced most of my US equity exposure with NTSX.
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.
For posterity’s sake: I became convinced this is practically doable (using either treasury futures, leveraged ETFs like NTSX, or maybe options which I don’t understand as well) and probably a good idea/not very dangerous if done correctly. I think that fact is slightly info-hazardous for a couple reasons:
You shouldn’t trust most people to correctly advise you on financial products, to not be delusional, or to have your best interests at heart. So it’s hard to figure out exactly what to do. Index funds overcome this problem through the sheer size of their giant pile of empirical evidence and expert consensus; basically everyone agrees that they work as advertised, and no one reports getting accidentally burned using index funds—except when the whole market crashes, where they behave as expected.
If you learn that it’s probably a good idea when done correctly, you might feel obligated to go do it, and then you might do it incorrectly and foreseeably lose a bunch of money.
Because the pile of empirical evidence is less giant, it might not turn out to be such a good idea in retrospect, so it’s fundamentally riskier (even taking into account the risks people calculate). I’m sure someone would argue the pile is giant, but even if true that’s probably only the case if you’re sufficiently expert to judge more obscure evidence piles which most of us are not.
So I’d STILL recommend you not do this unless you’re extremely curious in this area, have no hang-ups, feel competent and trust your own judgment around things like intimidating financial products, have no track record of unwise gambling behavior, and have a stable enough life that if you fuck up you won’t be in a bad situation.
Here’s some resources. If you’re not interested enough to read and enjoy stuff like this, probably avoid doing this:
https://www.aqr.com/Insights/Research/Journal-Article/Why-Not—Equities
https://www.amazon.com/Enhanced-Indexing-Strategies-Utilizing-Performance/dp/0470259256
https://www.bogleheads.org/forum/viewtopic.php?t=143037
But I’ll probably do it myself and might write a blog post about it.
I’m a big fan of NTSX and have done a bunch of back tests to see how it would have performed in various conditions. In all reasonably long time periods that I simulated, something like NTSX had lower volatility and higher return compared to SPY. About a year ago I went ahead and replaced most of my US equity exposure with NTSX.
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.