Risk and reward of fractionally leveraged ETFs in a stock/bond portfolio
DOI:
https://doi.org/10.61190/fsr.v27i4.3407Keywords:
Bootstrapping, Geometric Brownian motion, Simulation, Leveraged ETFsAbstract
This article investigates using 1.25X leveraged stock and bond exchange-traded funds (ETFs) as an asset allocation strategy. Performance is analyzed by replicating funds from 1989 to 2017, including all relevant costs. Conditions for excess returns are derived analytically and confirmed empirically. Simulations are conducted to assess performance under a variety of market condi- tions, and demonstrate opportunities for excess returns over unlevered funds in a 60/40 stock/ bond allocation. These results are accomplished with a small reduction in the Sharpe ratio and no need to access margin. We conclude that this asset allocation strategy could be well suited for investors more interested in total returns during upward trending markets.
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