SHORT 3x Leveraged Inverse ETF System on Long Bonds and S&P 500


Excel Spreadsheet showing an “idealised” short of 3x Leveraged Short Bond and Equity Funds TMV and SPXS and a monthly rebalanced version suggesting a balance may mitigate drawdown. Naive but educational.


Inverse leveraged bond and equity funds suck, unless you are good at market timing and skillfully buy them just before a crash. Since bond and equity markets tend to go up, leveraged inverse funds tend to go south very quickly.  So this spreadsheet provides a back test of SHORTING those funds and combining the shorts into a monthly rebalancing program.

There has been much criticism of leveraged ETFs. Perhaps rightly so, although they may serve a purpose for some. These products are new so we don’t know how they will behave in a severe market turndown. Leveraged ETFs are known to suffer from a number of disadvantages including “volatility drag”.

Shorting the US Long Bond and the S&P 500 Index is likely to be a disaster in the long term but may provide a hedge in a market crash. The ETFs I cover here are TMV and SPXS: INVERSE leveraged 3x the US Long Bond and the S&P 500 respectively. In other words they are SHORT bonds and equities. And they leverage the short position three times.

In the long term, bond funds are likely to increase in value because of the accumulated coupon. If the issuer does not go bust. In the long run, stock indices are likely to go up in value if economic growth and human ingenuity continue to reign supreme.

So in the long term you might like to be long bonds and stock indices rather than short. And if you want leveraged returns, you may achieve more by shorting inverse leveraged funds rather than holding leveraged long funds.

The spreadsheet offered here is naive in the extreme and only begins to cover the complexity of such a venture. The main naivety is in not covering a period of market crisis in the back test. This is impossible using real data since these funds only started trading in very late 2008, early 2009.

The second big naivety is that the spreadsheet glibly assumes you will be able to work out and put into practice a constant 1x leveraged short on these instruments, using either conventional short selling, futures or options.  It is no simple matter and hence most will prefer not to attempt it. This accounts in part for the popularity of XIV and other inverse volatility funds where the hard work of daily rebalancing is done for you by traders at big banks.

And then there are costs: commissions, slippage and so forth. And the timing of entries.

So all this spreadsheet will do for you is to give you a good education in the sort of techniques which may make sense with a lot of further thought and effort. Or may not make sense: that is up to you. If you spot crass mistakes let me know and I will correct them.  This is for education and is NOT investment advice. Nor is it a recommendation to enter upon such a risky venture.



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