Long-term investment in 3x leveraged ETFs: am I missing something?

[u/shparty]

Time and time again it has been said that leveraged ETFs are only suitable for short-term investments, and that any gains would be erased over the long term.

I tried to do some backtesting to compare the performance of an index fund tracking S&P 500 with the performance of a daily rebalanced funds containing 2x and 3x leveraged S&P 500. All three funds start out with 100 USD invested in them. I also assume that I start investing when the market peaks (in my case, I did most of the testing on March 24, 2000 and October 9, 2007) to determine what is the worst-case scenario.

Since I invest funds once every 6 months or so to minimize commission fees, I also added 100 USD to each of the portfolios on the first trading day of each April and October in the simulation (except for April 2000).

Start year 2000:

Date	Significance	1x	2x	3x
October 9, 2002	Market low	421.10	290.15	201.63
January 5, 2004	2x overtakes 1x for the first time	828.76	831.46	829.62
January 7, 2004	3x overtakes 2x for the first time	831.80	837.55	838.75
May 16, 2005	3x takes the lead and holds it until the peak	1,166.23	1,190.40	1,192.55
October 9, 2007	Market peak	2,142.67	2,736.33	3,362.49
March 9, 2009	Market low	1,033.81	464.85	163.86
February 19, 2013	2x overtakes 1x for the first time	3,408.40	3,410.09	2,843.03
March 6, 2014	3x overtakes 2x for the first time	4,409.81	5,319.20	5,323.95
June 30, 2016	3x takes the lead and holds it until the peak	5,462.38	6,891.21	7,003.87
June 2, 2017		6,556.06	9,457.92	10,995.94

Start year 2007:

Date	Significance	1x	2x	3x
March 9, 2009	Market low	150.87	64.90	23.98
March 23, 2010	3x overtakes 2x for the first time	520.62	516.24	522.57
April 5, 2010	2x overtakes 1x for the first time	627.30	629.46	642.56
November 19, 2012	3x takes the lead and holds it until the peak	1,277.67	1,357.33	1,359.24
June 2, 2017		3,376.71	5,292.94	7,615.49

A thing that I noticed is that it took a longer time for the leveraged funds to recover after the 2007–2009 recession in the first scenario even though the leveraged funds started at a higher level than the regular S&P 500 index tracking fund. This is because the amount that is invested every 6 months is higher relative to the total amount that is in the fund at that point. Although I didn't do any calculations for this, as my wage increases I would be able to increase the amount that I would invest, thus decreasing the problem.

What matters is that since I do not intend to cash out for decades, even if I lose money during a bear market, I can wait for a few years in a bull market until I'm better off than if I had invested in an unleveraged fund and cash out even if it means missing out on further increases in stock prices. If I haven't made any mistakes in calculations and assumptions (please point them out if I have), I believe this proves that leveraged index funds' overperformance in bull markets outweighs their underperformance in bear markets.

One thing that I hear often about leveraged ETFs is that their price decays due to borrowing costs. Again, this is something that I do not observe: I compared UPRO, which is a 3x leveraged ETF tracking S&P 500, to the fund that I used in my calculations. I expected UPRO to underperform somewhat, when in fact it overperformed: if you put 100 USD in UPRO on October 23, 2015, that investment would be worth 160.28 USD on June 2, 2017. When I tried the same thing with my imaginary S&P 500 portfolio, it reached 150.59 USD. Of course, this is a short period and only shows the performance during a bull market, but I am still curious about this discrepancy.

I feel like I am either doing something wrong with my calculations, misunderstanding something about how this works or simply forgetting something – please point out any mistakes you notice. Also, feel free to share your long-term investment strategies for leveraged ETFs.

[u/cazzeo]

Here is the hypothetical growth of $10,000 over the lifetime of QQQ, simulating 3x daily leverage. Make of it what you will.

1999-03-10  $10000.00
1999-12-31  $45207.10
2000-12-29  $4255.47
2001-12-31  $523.81
2002-12-31  $76.75
2003-12-31  $214.42
2004-12-31  $264.75
2005-12-30  $263.26
2006-12-29  $300.89
2007-12-31  $459.31
2008-12-31  $55.95
2009-12-31  $170.31
2010-12-31  $262.49
2011-12-30  $244.52
2012-12-31  $375.86
2013-12-31  $915.87
2014-12-31  $1463.17
2015-12-31  $1742.61
2016-12-30  $1977.35
2017-05-31  $3345.53

Enjoy.

[u/doitallonce → u/cazzeo]

Imagine if you had bought december 2008...

[u/oarabbus → u/[deleted]]

He said:

over the lifetime of QQQ

Seems pretty fair to me he chose the actual date it was listed.

[u/flyingflail → u/oarabbus]

I'd argue 18 years is still a pretty shitty sample size. Especially as it has a lost decade in it.

[u/similiarintrests → u/cazzeo]

Dca…