My tests are only preliminary, but clearly suggest that it is
probably better to trend-trade an energetic unleveraged ETF such as
[[SLYG]] than a leveraged ETF.
This study was partly inspired by "
The Small Cap Stock Index For You
," by Ploutos, from February 2013, which suggests small cap
investors should consider
based on the S&P-600. Coincidentally, I also recently posted my
results of 40-year trend-trading simulations in an article, "
The Best & Less of Long-Short Investing
." My results suggest that well-chosen trend-trading methods can be
highly effective for decreasing downturns while possibly not
decreasing long-term gains. However, these results also indicate
that trend-traders should compensate for periodic weaknesses with
the following measures.
- Add some investments in the best long-short mutual funds
they keep up with the S&P during normal periods such as
- Use buy-and-hold on 1/5 to 1/3 of each trend-traded
- Buy more aggressive ETFs.
So, I was interested in Ploutos' persuasive findings that the
S&P-600 has been, and seems likely to remain, significantly
advantaged. In addition to dodging downturns, an obvious advantage
of trend-trading is in telling us when to dive in for the bursts in
small-cap growth immediately after downturns. My initial lookups
indicated substantially greater 2009-2012 trend-trading potential
in the S&P-600 Growth Fund SLYG than in [[IWM]] for the
Russell-2000 or SPY for the S&P-500. See the following gain
records on 2013.02.27 according to
I include a few specialized ETFs that have done well recently,
to indicate the general potential of aggressive unleveraged ETFs,
for which well-planned trend-trading can be expected to reduce
downside risk. I list closely related ETFs together, while
attempting to represent the best returns for each index or
strategy, with recently better-performing strategies at the
Please note that SLYG has done well for a general fund, not as
likely as a sector-specific fund to have intermittent spurts, and
having more of a known quantity for determining optimal
trend-trading methods. However, there are other good choices. Also,
3-year and 5-year results tend to be similar because they straddle
the 2008 slump. A lower 5-year result does not necessarily indicate
a less energetic fund.
Meanwhile, I was also eager to test out whether perhaps
trend-trading might consistently harvest the often tempting and
sustained gains of a 3x leveraged non-inverse ETF. Relative to its
long-term disadvantage, the results went surprisingly well for the
3x but not well enough.
Please note that there is no 3x small-cap ETF old enough for
significant testing. A performance history was extrapolated by
tweaking a 1x and 2x until each of their recent performances
matched that of a 3x. Also, please do not consider these 5-year
results to be advice. I would do 20-year testing before deciding
what SMA to use. This is only a preliminary comparison of
trend-trading leveraged ETFs vs. unleveraged ETFs, during a period
which is favorable for trend-trading.
+3x Leveraged Small-Cap ETF: trend-trading gains
after -0.5% per trade slippage leeway.
2007.08 to 2012
+1x SLYG Unleveraged S&P-600 Growth ETF:
trend-trading gains after -0.5% per trade slippage
2007.08 to 2012
- It is remarkable that trend-trading was able to convert a
long-term negative into a positive cumulative for the 3x. On
average, this cumulative seems to be about 25% greater than for
- However the Max-Loss for the leveraged ETF also seems about
25% greater. In addition, the adjacent returns with the 120-day
SMA are much less than with the optimum result with the 115-day
SMA. This means we cannot be confident which sort of result the
future might produce. In comparison, note the consistently good
results for 3 adjacent SMAs for SLYG. This is to be expected
because SLYG has an advantage whether or not we use the best
- As shown in the end-of-2007 results, during which there was
little gain or loss for the market, the trend-trading of
leveraged ETFs could have converted neutral returns into
significantly negative returns. This never happens with
reasonable trend-trading methods on unleveraged ETFs.
- Meanwhile, as shown in the -16% for 2011 and +16% for 2012,
even hindsight-biased results for leveraged trend-trading may
seem somewhat good for one year and significantly not-good for
- I was unable to significantly improve 3x trend-trading
results with tweaking algorithms. This was to be expected.
Perhaps someone has better methods, and I am always finding new
ideas. But as a rule, you can always squeeze more from a juicy
orange (or unleveraged ETFs) but not necessarily from a dry
orange (or the negative long-term returns of leveraged
- Preliminary as these tests are, they surely suggest that a
consistently worthwhile method of trend-trading in leveraged ETFs
is unlikely to be obvious or for sale cheap, if it exists.
- If it is this unpromising to trend-trade against non-inverse
leverage, think thrice before you follow ubiquitous assumptions
about trend-trading inverse ETFs.
- Similarly, I do not know of any persuasive testing or theory
to support the ubiquitous notion that leveraged ETFs are somehow
less of a gambit for day trading than for long-term
Day traders often say that leveraged ETFs are not appropriate
for long-term investing but somehow appropriate for them. This
notion also seems implied by the SEC statements used to justify the
existence of leveraged ETFs.
Leveraged ETFs may help to enable certain day trading strategies
which otherwise might be unfeasible. However, if the daily plusses
and minuses do not add up to a long-term advantage, this means the
odds are against picking a good day to trade. Day traders might do
all right in the long run with leveraged ETFs, although not because
the odds change for them, but on the contrary, only because
long-term investors might do all right if they use trend-trading.
If I were a day trader and found leveraged ETFs necessary, I would
hasten to do 20-year and 40-year extrapolation studies for a 3x RUT
and 3x S&P just as card-counters use millions of simulations to
determine what to do on any single hand. Furthermore, however,
card-counters also attempt to flock to promotional events when the
casinos change the rules in their favor. Common sense and algebra
both dictate that if possible, one should not use leveraged ETFs.
Seek out strategies and instruments that are fundamentally
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Commercial Metals Management Discusses Q2 2013
Results - Earnings Call Transcript