Any chance you could do a deep dive into leveraged index funds in a future post? I’ve seen some analysis that has suggested an “ideal̶

Should You Ever Invest in a Leveraged Index Fund?

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2021-06-14 21:00:09

Any chance you could do a deep dive into leveraged index funds in a future post? I’ve seen some analysis that has suggested an “ideal” leverage ratio of 2-3x, other posts about the dangers of drift/holding on for too long, etc..

While I have previously discussed leverage and why I am generally against it, I’ve never actually analyzed leveraged index funds/ETFs, until now.

For the uninitiated, a leveraged index fund amplifies the daily return of a particular index through the use of debt. So if you bought a 3x leveraged S&P 500 index fund, your daily return would be magnified 3x. If the S&P 500 gains 1% in a day, you gain 3%.  If it gains 2%, you gain 6%.  What’s not to like?  Well, if the index loses 1% in day, you would lose 3%, and so forth. The amplification of daily returns happens on both the positive and the negative side. Because of this structure, if the index were ever to lose 33% in a single day, your 3x leveraged holding would be completely wiped out.

While it’s easy to talk about these losses in a vacuum, they are much more terrifying in real life. For example, during the coronavirus crash in 2020, a 3x leveraged ETF of the S&P 500 declined by 77% in total (at its worst point) compared to only a 33% decline for the underlying index:

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