Buy And Hold Leveraged ETFs February 19, 2025
Buy and hold strategies with leveraged ETFs are often dismissed due to misconceptions and effects such as volatility decay or the fear that "hidden" costs will erode all returns. Volatility decay is real and so are "hidden" costs. However, with proper understanding, long-term buying and holding leveraged ETFs can still be a viable strategy to increase returns.
In this guide, we'll briefly go over the basics and benefits of leveraged ETFs. Then, we take a look at backtests to see how leveraged ETFs would have performed during different market conditions.
Understanding the Basics
Before jumping into backtests, it's important to understand the basics of leveraged ETFs and how they work. Of course you are free to explore backtests first and then learn about the theory.
- How volatility decay affects long-term returns
- The impact of leverage expansion in trending markets
- What "hidden" costs are. Check out how our backtests account for all costs
Benefits Of Leveraged ETFs
Leveraged ETFs also offer several benefits that other forms of leverage may not offer.
Simple To Implement
Depending in your broker, you can buy and sell leveraged ETFs just like any other stock. By using a savings plan you may even be able to buy shares of an ETF that you may otherwise find too expensive. Example: a share may cost 100$ and you only want to invest 10$.
The ETF provider will also take care of borrowing money to leverage the ETF, so you don't have to worry about it.
No Margin Calls
Other forms of leverage such as margin accounts or futures can lead to margin calls, where you have to deposit more money into your account. This is not the case with leveraged ETFs.
Proven Track Records
Leveraged ETFs are still somewhat new, but for example the SSO has been around long enough to have survived the financial crisis of 2008 and the COVID-19 crash in 2020.
Economy of Scale
Since leveraged ETFs are a predictable investment vehicle for ETF providers, brokers and banks, they can take advantage of economies of scale and offer lower costs than other forms of leverage.
Relatively Low Costs
Beyond TER and the risk free rate, there are relatively low costs. As our simulations against real data show.
Using Backtests To Validate Buy And Hold
Yes, past returns do not guarantee future returns. However, the S&P 500 has had a long history of returns and volatility.
Our data goes back to 1885. At the time of writing this article, that is a timespan of 140 years. 140 years is a really long time. Just as a reference, in 1885 Karl Benz invents the first practical automobile powered by an internal combustion engine. Coca-Cola was introduced 1 year later in 1886.
A Simple Observation
Let's imagine we invested 100$ into the SSO in 1885. Just a simple lump sum investment. The SSO is a 2x leveraged ETF offered by ProShares with a TER of 0.89% (As of February 19, 2025).
If you sold 11th February 2025, you would have about 228 million $ (taxes not applied). Investing in the regular S&P 500 Total Return Index would have yielded "only" 39 million $ (taxes not applied). Note how the compounding effects make both investments look like nothing happened before ~1980. But you can see the dot com bubble bursting after 2000, the financial crisis of 2008 and the COVID-19 crash in 2020.
The graphs were produced with our backtesting tool
Conclusion
All crashes that happened since 1885 were not just survived, we still beat the S&P 500 Total Return Index. Yes, a drawdown of nearly 99% happened during the great depression with the bottom being reached in 1932. Yet, our investment still recovered and beat the underlying index despite all the other crashes that happened too. Oil Crisis in the 70s, Black Monday in 1987, the dot com bubble, the financial crisis of 2008, the COVID-19 crash, just to name a few.
We can also see that volatility decay did not eat up all returns and our investment survived volatility just fine.
What we can see though is that the volatility of leveraged ETFs is much higher than the S&P 500 Total Return Index. There were long periods where the leveraged ETF underperformed, especially in the early years. Check out the backtesting tool to see for yourself.
Now we could dive into more examples. Look at specific periods and analyze the effects of dollar cost averaging or trying to time the market.
Luckily, we offer tools so that you can explore the data yourself. Check out our backtesting tool to see how leveraged ETFs would have performed during different market conditions. Or check out our advanced backtesting tool to run multiple simulations at once.