A.I.M. Users Bulletin Board

[ls7550]

RE: Leveraged ETF's.

Direxion says these should be used only by "sophisticated" investors

They all say the same about - only for sophisticated investors and only for short term .... etc. as they have to, to avoid being sued by 'un-sophisticated' investors, who might otherwise expect a 2x DAILY rebalanced fund to provide twice the longer term gain (loss).

I hold long LETF's longer term and I'm very pleased with the results, but I only scale to 1x exposure levels i.e. a third in the 3x, two thirds in TIPS (inflation bonds). The TIPS broadly matches the carry costs (what the LETF fund incurs to borrow in order to provide leverage). Rebalancing back to target weightings i.e. 33.3% 3x, 66.7% TIPS once each year generally keeps tracking of the 1x relatively tight, without incurring excessive trading costs (that would be incurred if rebalanced more frequently).

Boost ETF's (http://www.boostetp.com/) are a more recent addition to this side of the pond set. They're not yet UK reporting registered so any capital gains would currently be taxed by HMRC (tax office) as income - as they're 'offshore funds' (Ireland). Boost are however progressing UK reporting registration so once that's done capital gains will be taxed as capital gains thereafter (provided you buy after the fund became UK reporting registered).

Most of the European LETF's are accumulation, so there's no worries/costs having to reinvest dividends. You do however have to declare the 'Excess Reportable Income' to HMRC - as though you'd been paid the dividend (and increase the cost of stock by the dividend amount so that you don't pay capital gains on what you'd already paid dividend/income tax on).

With a third in the 3x, two thirds in TIPS (US, INXG UK i.e. inflation bonds) generally tracking 100% in the 1x, then if the TIPS holding achieve > TIPS reward (or more strictly > than what the LETF fund incurs to borrow), then you achieve > 100% stock rewards. Beating TIPS is easier than picking stocks that beat the average IMO.

It also means you can cram more into tax efficient space. If your TIPS are tax efficient and you have $10K of tax efficient stock space available, then you can in effect cram $30K of stock exposure into that tax efficient space.

The costs can appear high, but when you hold just a third of the amount in the fund that scales down.

As a side note, to quote something, just type [ quote ] at the start and [ /quote ] at the end (but without any space character between the square opening/closing brackets). e.g. something like [xuote]text you want to quote[/xuote] - but replacing the x's with q's.

Clive.