I also hold some riskier 'bonds' that yield in excess of 8% that if cash reserves did get down that low I'd rather not sell, so the easier option is simply to switch from using 2x to using a 3x version of the LETF.
I don't understand the logic of switching to a 3x LETF. It would seem to me to accelerate buying in a down cycle because of the increased volatility (or selling in an up cycle) thereby requiring more, not less, cash. What am I missing?
If initially you hold $5000 in 2x, $5000 in bonds you've in effect $10,000 of 1X stock value
If stocks drop and you end up holding $3500 in 2x, $5000 in bonds $8500 total (i.e. 1x stock exposure down around 15%), then that's like holding $7000 in 1X stock and $1500 in bonds - whereas you'd want to be holding around $8500 of stock exposure (1x stock value down 15% from $10,000 to $8500). If you rebalance to a third in 3x, two thirds in bonds ($2833 3X, $5667 bonds) you're in effect holding 3 x 2833 = $8500 1X stock exposure whilst your bonds have increased from $5000 to $5667 i.e. you've increased stock exposure without having to sell bonds - that might be tied into a higher return. Had you rebalanced 2x holdings, then you'd be holding $4250 2x and $4250 bonds to provide the same $8500 of 1x stock exposure equivalent - which would have entailed reducing bond holdings down from $5000 to $4250 (sell $750 worth of bonds, perhaps incurring a early withdrawal penalty for doing so).
Later if the $5000 that was perhaps in a 1 year term bond matures, and assuming stock price/values remained the exact same then I might switch back to using half in 2x, half in bonds ($4250 2x, $4250 bonds) and only roll that $4250 amount into a replacement 1 year bond.
You can leverage with Futures (and/or Options), however with those you can have to front up margin at any time or risk having the position closed out, possibly at a deep discount (worst possible time). With LETF's that risk is mitigated and you wont be closed out unfavourably. The cost however is that LETF's cost more - the carry (borrowing) cost is higher than for Futures. With one (Futures) you need cash readily (immediately) to hand - and that cash typically will earn less than if you can tie it up for longer - which you can if you're using LETF's. Overall that somewhat washes - with both comparing overall. Of the two the LETF however is the safer choice as that's more likely to avoid you coming home one day to see that the price of stock had dived briefly during the day, a margin call wasn't filed and your position was closed out at that low share price (and perhaps had subsequently recovered).
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