Replies to post #38257 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Re : Leveraged/non leveraged rotations

The top two charts in this image show how XS2D/TIP (half in 2x S&P500, half in TIP) rebalanced once yearly compared to SPY (S&P500 ETF). Those values are total gains including ETF fees (but excluded taxes). The adjacent top chart is for SSO/TIP and a longer timeframe. Generally the two compare quite well IME. (XS2D/TIP left column of images, SSO/TIP on the right)

The next charts below those top charts shows the spread between the half in 2x, half in bonds compared to 100% stock (SPY). At times the two do drift, sometimes in a positive manner, sometimes in a negative manner.



The bottom row of charts is the gains if you arbitraged the two and rotated into the 2x/TIP choice when it was lagging SPY, and rotated back into 100% SPY whenever the 2x/TIP choice was leading SPY. The trigger point in both of those charts was a 4% spread (based on monthly reviews). i.e. if SSO/TIP was lagging SPY by -4% then rotate into SSO/TIP and when SSO/TIP was leading SPY by 4% rotate back into SPY. No trading fees were considered for such rotations, however the benefits would more than compensated for such trading costs (the frequency of rotations is also relatively low).

A leveraged ETF generally scales up exposure after each rise, and reduces exposure after a decline i.e. amplifies gains, attenuates losses. The spread between the two can also be a consequence of LIBOR versus (in these cases) TIP i.e. if TIPS pulls relatively ahead it can trigger a switch out of TIPS trade event (or into TIPS if TIPS are relatively down). With both of those sets currently rotated into 2x/TIP that is a potential indication that the 2x/TIP will perform more strongly than SPY i.e. either decline less or rise more. My guess is that's more a move to 'declining less'. But that's just a guess that doesn't matter as you just react to whatever occurs when using such a strategy.

I believe in the US you're taxed more for shorter term gains (trading often) whereas in the UK we're not, so such a rotational strategy might not be appropriate for US investors as you can at times see relatively quick turn-arounds (short periods between rotations).

[OldAIMGuy]

Hi Clive, Re: Leveraged funds vs occasional margin buying..............

I can see where the higher expense of leveraged funds might still be less than occasional borrowing of $$$ on margin.

My thought had been if we were SPY investors, for instance, then if we ran out of cash in late 2008, just keep buying AIM's designated amount but borrow on margin to do so. AIM would then direct the liquidation of shares during the recovery period which then would pay down the margin expense over time. My guess is that if one had done so in the 2008-09 Panic the margin account would have been cleared of debt by around the end of 2009. AIM would have made ~20% to ~30% or a bit more on the settling of the margin account which might have been charging 6% to 8% per year for the use of the money. One's net gain on the margined shares would be affected by the additional costs, but overall return would have been healthy.

One way would be a trickle of additional expense over the long haul and the other would be a stream of more expense for a short time. We'd need a bean counter to decide who won!