Ultra S&P500

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watchnerd
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Ultra S&P500

Post by watchnerd »

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.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
xerty24
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you don't want Ultra funds for the long term

Post by xerty24 »

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%.
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Russell
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Re: Ultra S&P500

Post by Russell »

Hi Watchnerd --
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
Here's the arithmetic.

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)
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....
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
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zhiwiller
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Post by zhiwiller »

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.
Flapjack_5
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Post by Flapjack_5 »

Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
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watchnerd
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Post by watchnerd »

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.
That's a good example for SSO vs SPY by itself, but I'm trying to figure out the whole port performance.

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
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watchnerd
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Post by watchnerd »

Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
I'm sure I'm already in deep water for holding whacky things like DBV, individual stocks, the occasional option.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
rich
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Post by rich »

Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
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.
Last edited by rich on Thu Sep 20, 2007 12:10 am, edited 3 times in total.
Best regards, | Rich
rich
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Post by rich »

watchnerd wrote:
Flapjack_5 wrote:Watchnerd, I'm surprised that Rich hasn't accused you of being a troll for daring to mention a Proshares ETF .
I'm sure I'm already in deep water for holding whacky things like DBV, individual stocks, the occasional option.
Well certainly not from me. I enjoy your posts. Cheers!
Best regards, | Rich
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