One Year Later. Leveraged ETFs in Portfolio Construction and Portfolio Protection

Abstract

One year after Coronovirus and three years later after initially suggesting them, we revisit the performance of balanced portfolios of leveraged ETFs that we initially suggested in the 2017 paper. Leveraged ETFs provide a convenient mechanism to dynamically change portfolio exposure and can be successfully used to construct robust portfolios that perform well during equity market drops. We start with a classical 60 percent Bonds/ 40 percent Stocks portfolio with monthly rebalancing that delivered 9.5 percent annually from January 1, 1986, to January 15, 2021. Its 120 percent leveraged cousin that is 72 percent Bonds/ 48 percent Stocks delivered 10.6 percent annually since 1986, same as SP500 but with lower volatility and drawdowns. Instead of leveraging with borrowing at the portfolio level, we can use a portfolio of leveraged ETFs. \n \nAt the beginning of the paper we consider several balanced stocks/bonds portfolios created with leveraged ETFs but without borrowing money at the portfolio level and show that they present a very attractive risk-adjusted alternative to just stock index and classical stocks/bonds portfolios without leverage. A particular portfolio of 40 percent TQQQ, 20 percent TMF, 40 percent TLT with monthly rebalancing proposed by us in the 2017 paper as a leveraged ETF alternative to classical stocks/bonds portfolios performed well in 2018 and through the Coronavirus crisis up to January 15, 2021. We reviewed the performance of the 40-20-40 portfolio in our paper a year ago. Now after the Coronovirus crisis, we see that balanced portfolios suggested in 2017 sustained the crisis very well and performed well in 2020. \n \nA classical portfolio insurance strategy of Black-Jones-Perold can be easily implemented with leveraged ETFs. More complex dynamic portfolio strategies can also be implemented using leveraged ETFs.