Robust Leveraged ETF Portfolios Extending Classic 40/60 Portfolios and Portfolio Insurance

65 Pages Posted: 19 Mar 2020

Date Written: March 5, 2020

Abstract

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. We start with a classical 60 percent Bonds/ 40 percent Stocks portfolio with monthly rebalancing that delivered 9.4 percent annually over since 1986. Its 120 percent leveraged cousin that is 72 percent Bonds/ 48 percent Stocks delivered 10.4 percent annually since 1986, same as stocks but with lower volatility and drawdowns. Instead of leveraging with borrowing at portfolio level we can use a portfolio of leveraged ETFs.

We consider several balanced stocks/bonds portfolios created with leveraged ETFs but without borrowing money at portfolio level and show that they present a very attractive risk-adjusted alternative to just stock index and classical stocks/bonds portfolios without leverage. In particular portfolio of 40 percent TQQQ, 20 percent TMF, 40 percent TLT with monthly rebalancing proposed by us in 2017 paper as a leveraged ETF alternative to classical stocks/bonds portfolios performed well in 2018 and through beginning of Coronavirus crisis up to February 28, 2020. What happens to this portfolio as crisis continues still to be seen.

A classical portfolio insurance strategy of Black-Jones-Perold can be easily implemented with leveraged ETFs. More complex dynamic portfolio strategies can also be implemented using leveraged ETFs.

Keywords: Portfolio Insurance, 40/60, Balanced portfolios, ETFs, leveraged ETFs

JEL Classification: G00, G11, G12, G13, G19, G20, G23, G29

Suggested Citation

Smirnov, Mikhail and Smirnov, Alexander, Robust Leveraged ETF Portfolios Extending Classic 40/60 Portfolios and Portfolio Insurance (March 5, 2020). Available at SSRN: https://ssrn.com/abstract=3549581 or http://dx.doi.org/10.2139/ssrn.3549581

Mikhail Smirnov (Contact Author)

Columbia University ( email )

New York, NY 10027
United States

Alexander Smirnov

Stuyvesant High School

New York, NY
United States

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