Leveraged ETFs hedging strategies for rising rates
Leveraged ETFs can be used as a hedge against inflation. Equities around the globe are falling due to the Central Banks’ aggressive stance against inflation.
It is hard to predict when they will stop raising rates. We have a resilient job market leading investors to believe that the Fed will not stop raising rates till inflation has significantly come down.
Even though leveraged ETFs are risky investments, they can play a big role in hedging or speculation, especially during periods of market volatility.
Leveraged ETFs have produced excellent returns following the 2008 financial-economic crisis.
Proshares leveraged ETF TBT is inversely correlated for the most part to the performance of the equities market.
ProShares UltraShort 20+ Year Treasury (TBT) goals
The goal of the ProShares UltraShort 20+ Year ETF is to profit from a decline of the ICE U.S. Treasury 20+ Year Bond Index.
The funds track two times the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index before fees and expenses.
Leveraged ETFs can quickly amplify gains or losses during periods of significant market volatility.
It is important to have a strategy in place to avoid losses being greater than the losses of the underlying asset for a given time horizon.
ProShares UltraShort 20+ Year ETF can help to reduce the risk of too much exposure to the equity market and rising rates.
The market will decline during periods of high inflation. Bonds also will perform badly during periods of rising rates.
Popular leveraged and inverse ETFs
ProShares UltraPro Nasdaq-100 Bull 3x leveraged ETF- TQQQ ETF
ProShares UltraPro Nasdaq-100 Bear 3x inverse ETF-SQQQ ETF
Direxion Daily Semiconductor Bull 3x leveraged ETF- SOXL ETF
Direxion Daily Semiconductor Bear 3x inverse ETF- SOXS ETF
Direxion Daily Biotech Bull 3x leveraged ETF- LABU ETF
Direxion Daily Biotech Bear 3x inverse ETF -LABD ETF
Direxion Small Cap Bull 3x leveraged ETF-TNA ETF
Direxion Small Cap Bear 3x inverse ETF-TZA ETF
Direxion S&P 500 Bull 3x leveraged ETF-SPXL ETF
Direxion S&P 500 Bear 3x inverse ETF-SPXU ETF
Proshares Ultra QQQ (Nasdaq-100) Bull 2x leveraged ETF-QLD ETF
Proshares UltraShort QQQ (Nasdaq-100) Bear 2x inverse ETF-QID ETF
Proshares Ultra S&P 500 Bull 2x leveraged ETF-SSO ETF
Proshares UltraShort S&P 500 Bear 2x inverse ETF-SDS ETF
Can an investor build a long-term portfolio around leveraged ETFs or just ignore leveraged ETFs because of the high risks involved?
We know the risks that pose these leveraged ETFs.They can be useful for a long-term portfolio during periods of low market volatility and economic expansion.
Risk tolerance levels may differ from person to person.
Inverse ETFs can serve as a short-term portfolio hedge during periods of high volatility.
Central banks will eventually stop raising rates. When we reach that point, a new bull market will start in the United States, and the fear market gauge will be subdued.
It will be the best moment for leveraged ETFs to be deployed to maximize return than the SP500 return.
Past investment performance is not always indicative of future results. One thing is certain, equities go up more than go down.
Therefore, one strategy is to deploy an UltraShort 20+ Year Treasury (TBT) leveraged ETF to hedge our portfolio during a rising rate environment.
Leveraged ETF strategies for growing a portfolio quickly
1. Select a leveraged ETF with a decent trading volume
2. Dollar Cost average of a leveraged ETF investment
3. Schedule consistently an investment into leveraged ETF
4. Diversify by using a few different leveraged ETFs in your portfolio
5. Evaluate periodically leveraged ETFs portfolio at least once each year and take profit if the market is trending down
6. Consider adding inverse ETF to a leveraged ETF portfolio during a period of extreme volatility
Leveraged Funds TBT Core Holdings
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP GOLDMAN SACHS INTERNATIONAL
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP SOCIETE GENERALE
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP BANK OF AMERICA NA
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP CITIBANK NA
- US LONG BOND(CBT) BOND 21/SEP/2022 USU2 COMMODITY
Other Bond ETFs are:
| TLT | iShares 20+ Year Treasury Bond ETF |
| TBT | ProShares UltraShort 20+ Year Treasury |
| TMV | Direxion Daily 20+ Year Treasury Bear 3x Shares |
| TBF | ProShares Short 20+ Year Treasury |
| TMF | Direxion Daily 20+ Year Treasury Bull 3X Shares |
| TTT | ProShares UltraPro Short 20+ Year Treasury |
| UBT | ProShares Ultra 20+ Year Treasury |
If you invest constantly at the beginning of each month $100 starting January 2022 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will gain close to 12% this year as of August 15, 2022, while all the broad-based indexes are significantly down.
If you invest constantly at the beginning of each month $100 starting January 2021 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will lose close to 8% at the end of the year 2021 while all the broad-based indexes are significantly higher.
If you invest constantly at the beginning of each month $100 starting in January 2020 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will lose close to 1% at the end of the year 2020 while all the broad-based indexes are significantly higher.
What will happen to the leveraged ETF TBT when the underlying index ICE U.S. Treasury 20+ Year Bond Index is up at least 50% in one day?
The objective of the leveraged ETF TBT is to outperform double inversely the return of the ICE U.S. Treasury 20+ Year Bond Index therefore you can technically lose all your money.
In 2020, the price of US oil West Texas Intermediate WTI turned negative for the first time in US history.
How investors can hedge a portfolio with inverse ETF TBT?
Equities have a negative correlation with treasury bonds and rising rates.
Treasury bonds don’t do well during rising rates environment therefore the inverse bond ETF will outperform the market during that period.
An example of leveraged ETF portfolio will be to combine leveraged ETF TQQQ, SPXL, and TBT.
| Leveraged ETFs | Description | Beta (5Y Monthly) |
| TQQQ | ProShares UltraPro QQQ (TQQQ) | 3.5 |
| SPXL | Direxion Daily S&P 500 Bull 3X Shares (SPXL) | 3.15 |
| TBT | ProShares UltraShort 20+ Year Treasury (TBT) | -4.88 |
What if a portfolio is built based on 60% equity and 40% bond using leveraged ETFs above?
Suppose that you invest $100 each month into this portfolio ($30 in TQQQ, $30 in SPXL, and $40 in TBT) starting January 2022. You will significantly outperform the indexes.
Your portfolio return as of August 15, 2022, will be negatively impacted if you invest a lump sum for example $1000 at the beginning of the year in addition to the $100 monthly amount.
| Ticker | No Lump Sum | With Lump Sum |
| TQQQ | 1% | -20% |
| SPXL | 6% | -4% |
| TBT | 12% | 27% |
Key Takeaways from investing in leveraged ETFs
1.Leveraged ETFs investments are very risky, especially during periods of high volatility.
2. Investors can lose their entire capital if the underlying indexes happen to fall at least 33%. Investors using leveraged ETFs in their portfolio must learn to take a profit at least once a year.
3. Leveraging ETF is a very useful portfolio management tool for growing a small account if used strategically.
4. Leverage ETF works better during periods of low market volatility.
4. Leveraged ETF uses financial derivatives therefore, their expenses and fees are often significantly higher than the ETFs tracking the underlying indexes
5. Stay diversified. Don’t put all your eggs in one basket. Leveraged ETFs should be used in the context of portfolio diversification.
6. Dollar Cost averages your investment monthly. Using a lump sum investment can be detrimental to your portfolio during downtrends.
7. Stay small. Don’t invest the biggest portion of your capital into leveraged ETFs for long-term
8. Without risk, there is no reward. If you are a long-term investor with at least a 10 years time horizon, adding a small portion of your investment into leveraged ETFs strategically is not a bad idea at all.
9. The Fed will eventually stop raising rates when inflation is under control. Hopefully, we are not in recession.
ProShares UltraPro Nasdaq-100 Bull 3x leveraged ETF- TQQQ ETF
Direxion S&P 500 Bull 3x leveraged ETF-SPXL ETF
ProShares UltraShort 20+ Year Treasury (TBT)
Full Disclaimer
This post is for information purposes only. Please consult with your financial advisor if you need investment advice.
