Ultra S&P500
Ultra S&P500
What would be the best way to compare the risk/return characteristics of the two following hypothetical portfolios?
Port 1:
50% SPY (S&P 500) / 50% BND (total bond market)
Port 2:
25% SSO (2 X S&P 500) / 75% BND
Any other comments on the pros and cons of the two ports are also welcome.
Port 1:
50% SPY (S&P 500) / 50% BND (total bond market)
Port 2:
25% SSO (2 X S&P 500) / 75% BND
Any other comments on the pros and cons of the two ports are also welcome.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
you don't want Ultra funds for the long term
First of all, the expenses are really high (0.95%).
Second, due to compounding effects, you can't hope to get 2x the annual S&P return that you might expect. The management tries* to achieve 2x daily S&P returns, which, when compounded, leads to moderate additional gains during up markets (but not 2x) and really bad losses (worse than 2x) during down markets. You also lose a reasonable amount of money in flat markets.
The 2x ETF is good for buying extra leverage in very short term trading, but I kinda doubt that's your intention. For the long term, don't bother.
Yahoo Chart of SSO vs SPX
In the past 1.25 years since its inception, SSO is up about 30% while the S&P is up about 20%.
Second, due to compounding effects, you can't hope to get 2x the annual S&P return that you might expect. The management tries* to achieve 2x daily S&P returns, which, when compounded, leads to moderate additional gains during up markets (but not 2x) and really bad losses (worse than 2x) during down markets. You also lose a reasonable amount of money in flat markets.
The 2x ETF is good for buying extra leverage in very short term trading, but I kinda doubt that's your intention. For the long term, don't bother.
Yahoo Chart of SSO vs SPX
In the past 1.25 years since its inception, SSO is up about 30% while the S&P is up about 20%.
Re: Ultra S&P500
Hi Watchnerd --
On an annual basis, SSO matches its bogey (2*S&P - 1*Cash) almost perfectly -- except that it loses about 5 points (500 basis points) a year. See xerty's post above for the reasoning or my website for a visual regression demonstration. I have uploaded Profunds Ultrabull fund into my Fama-French applet.
So....
The difference, then, can be thought of as the additional 25% (leveraged) bond exposure and the -1.25 alpha from the structural flaws of SSO.
If you want to pursue a portfolio structured this way, skip SSO and just buy deep-in-the-money calls on the etf SPY or the index SPX itself....
Here's the arithmetic.watchnerd wrote:What would be the best way to compare the risk/return characteristics of the two following hypothetical portfolios?
Port 1: 50% SPY (S&P 500) / 50% BND (total bond market)
Port 2: 25% SSO (2 X S&P 500) / 75% BND
On an annual basis, SSO matches its bogey (2*S&P - 1*Cash) almost perfectly -- except that it loses about 5 points (500 basis points) a year. See xerty's post above for the reasoning or my website for a visual regression demonstration. I have uploaded Profunds Ultrabull fund into my Fama-French applet.
So....
Code: Select all
1/4 SSO + 3/4 BND = 1/4 (2*S&P - 1*Cash - 5) + 3/4 BND
= 1/2 S&P - 1/4 Cash - 5/4 + 3/4 BND
= 1/2 S&P + 1/2 BND + (1/4 BND - 1/4 Cash - 5/4)
If you want to pursue a portfolio structured this way, skip SSO and just buy deep-in-the-money calls on the etf SPY or the index SPX itself....
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
The magic of doubling the daily returns...
Index:
Day 1: 100
Day 2: 110 (+10%)
Day 3: 121 (+10%)
Day 4: 90 (-25.6%)
Day 5: 100 (+10%)
Double Daily Performance:
Day 1: 100
Day 2: 120 (+20%)
Day 3: 144 (+20%, looking good)
Day 4: 70.8 (-51.2%, oh god the pain)
Day 5: 85 (+20%)
Buy and hold indexer: 0%
2x magic formula guy: Not 0%, actually -15%.
The numbers were picked at random to illustrate the point that even if they can meet their investment objective, it doesn't matter for a buy-and-hold investor. Unless the market goes up every day, that is.
Index:
Day 1: 100
Day 2: 110 (+10%)
Day 3: 121 (+10%)
Day 4: 90 (-25.6%)
Day 5: 100 (+10%)
Double Daily Performance:
Day 1: 100
Day 2: 120 (+20%)
Day 3: 144 (+20%, looking good)
Day 4: 70.8 (-51.2%, oh god the pain)
Day 5: 85 (+20%)
Buy and hold indexer: 0%
2x magic formula guy: Not 0%, actually -15%.
The numbers were picked at random to illustrate the point that even if they can meet their investment objective, it doesn't matter for a buy-and-hold investor. Unless the market goes up every day, that is.
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- Posts: 34
- Joined: Thu Jul 26, 2007 12:40 pm
That's a good example for SSO vs SPY by itself, but I'm trying to figure out the whole port performance.zhiwiller wrote:The magic of doubling the daily returns...
Index:
Day 1: 100
Day 2: 110 (+10%)
Day 3: 121 (+10%)
Day 4: 90 (-25.6%)
Day 5: 100 (+10%)
Double Daily Performance:
Day 1: 100
Day 2: 120 (+20%)
Day 3: 144 (+20%, looking good)
Day 4: 70.8 (-51.2%, oh god the pain)
Day 5: 85 (+20%)
Buy and hold indexer: 0%
2x magic formula guy: Not 0%, actually -15%.
The numbers were picked at random to illustrate the point that even if they can meet their investment objective, it doesn't matter for a buy-and-hold investor. Unless the market goes up every day, that is.
Fitting the above into my original hypothetical ports, and I'm going to assume the bond returns 1% over 5 days (yeah, a lot for a bond in 5 days), I get:
Port 1:
SPY 50% * 10% = 5%
+
BND 50% * 1% = 0.5%
Total: 5.5%
Port 2
SSO 25% * -15% = -3.75%
+
BND 75% * 1% = 0.75%
Total: -3.00%
Hurm, my intuition was making me think that allocating half as much to a 2 x SPY account would be roughly equal to SPY, but apparently that's not at all the case. A bit counter-intuitive.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
I'm sure I'm already in deep water for holding whacky things like DBV, individual stocks, the occasional option.Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
I did apologize. Again, the main reason why I said something is because you were a brand new poster linking to your own blog. I incorrectly thought you were just trying to increase your Google rank (and I was having a bad day). Again, I apologize.Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
Last edited by rich on Thu Sep 20, 2007 12:10 am, edited 3 times in total.
Best regards, |
Rich
Well certainly not from me. I enjoy your posts. Cheers!watchnerd wrote:I'm sure I'm already in deep water for holding whacky things like DBV, individual stocks, the occasional option.Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
Best regards, |
Rich