Leveraged ETFs Held Up ‘Very Well’ During Coronavirus Crisis

A researcher at Columbia says a portfolio of leveraged ETFs can handle stock market drops — and provides an attractive alternative to a traditional 60-40 allocation to stocks and bonds.

Noriko Hiyashi/Bloomberg

Noriko Hiyashi/Bloomberg

As investors weigh alternatives to traditional stocks and bonds, a researcher with Columbia University’s mathematics of finance program found that leveraged exchange-traded funds can hold up well through tumultuous times.

Mikhail Smirnov, a senior lecturer in Columbia’s math department who earned a Ph.D. from Princeton University in 1995, said in a paper this week that a portfolio of leveraged ETFs that he proposed in 2017 provides very attractive risk-adjusted returns compared with a classic mix of 60 percent stocks and 40 percent bonds or just a stock index. He suggested such ETFs are a constructive alternative to leveraging stocks and bonds at the portfolio level.

“After the coronavirus crisis, we see that balanced portfolios suggested in 2017 sustained the crisis very well and performed well in 2020,” Smirnov said in the paper. “Leveraged ETFs provide a convenient mechanism to dynamically change portfolio exposure and can be successfully used to construct robust portfolios that perform well during equity market drops.”

He said an aggressive portfolio that is 40 percent invested in a triple leveraged Nasdaq 100 ETF, 20 percent allocated to a triple leveraged long U.S. government bonds index ETF, and 20 percent exposed to a single leveraged long U.S. government bonds index ETF performed well in 2018 and through the coronavirus crisis up to the middle of this month.

Smirnov constructed the portfolio next to a classic mix of stocks and bonds held through two mutual funds managed by Vanguard Group, as well as a holding with a higher allocation to bonds that was levered 20 percent at the portfolio level. As part of his study, the portfolios were rebalanced monthly.

The traditional portfolio produced a 9.5 percent return annually from the start of 1986 to January 15, said Smirnov, lagging the 10.6 percent annual gain delivered by the leveraged portfolio of stock and bond mutual funds over the same period. Its “120 percent leveraged cousin,” with an allocation of 72 percent in bonds and 48 percent in stocks, delivered the same returns as the S&P 500 index but with lower volatility and drawdowns, he said.


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ETFs haven’t been around as long as mutual funds, but they have boomed in popularity — and variety — since the first one, State Street Corp.’s SPDR S&P 500 ETF Trust, was introduced in the U.S. in 1993.

Smirnov studied the more recent performance of the 40-20-40 leveraged ETF portfolio that he proposed in 2017. His paper shows the portfolio had an annual return of 27.2 percent in the five years through 2017, with annualized gains increasing to 32 percent over the longer stretch from the start of 2013 to mid-January.

He also compared the performance of the leveraged ETF portfolio with State Street’s SPDR S&P 500 ETF Trust, which trades under the ticker SPY, from August 12, 2005 to January 15.

The portfolio — which allocates 40 percent to the ProShares UltraPro QQQ fund, 20 percent to Direxion Daily 20+ Year Treasury Bull 3X Shares, and 40 percent to iShares 20+ Year Treasury Bond ETF — had an annual total return of 24.5 percent over the more than 15-year period through the middle of this month. That exceeded the 9.7 percent total return of the ETF tracking the performance of the S&P 500.

The time frame Smirnov considered ran through the global financial crisis of 2008 – 2009, when stocks crashed and the Federal Reserve swooped in to support markets. The Fed intervened with emergency programs again last year after the coronavirus crisis jolted stock and bonds into steep decline.

While the 40-20-40 portfolio endured higher annual volatility from August 2005 through mid-January, Smirnov found the investment holding’s maximum drawdown of 51.5 percent was lower than the 55.2 percent seen by the SPY ETF.