By Brett Arends, MarketWatch
Photo by Paul Kane/Getty Images
An investor writes : “Dollar cost averaging into 50% UPRO and 50% TMF has proved to return an annual growth rate of 33%. Who is dumb enough to waste their time doing anything else?”
The short answer is the old economist’s joke: Sure, it works in practice. It just doesn’t work in theory.
UPRO /zigman2/quotes/200149842/composite UPRO +9.49% is the ProShares UltraPro S&P 500 exchange-traded fund, a high-octane fund that aims to do three times the return of the S&P 500 index every single day. So if the S&P 500 /zigman2/quotes/210599714/realtime SPX +3.06% is up 1%, it should be up 3%. And so on.
TMF /zigman2/quotes/209018185/composite TMF -4.07% — Direxion Daily 20+ Year Treasury Bull 3x Shares—aims to do the same thing with long-term Treasury bonds.
After all, if it’s a good idea to invest in a simple portfolio of stocks and bonds, goes the question, why isn’t it three times as good to invest in levered “3x” funds that get you the same stocks and bonds with three times the return?
Way back in 2009, when these levered funds were new, this wild strategy became so popular with mom and pop investors that the Securities and Exchange Commission and the Financial Industry Regulatory Authority put out a joint warning statement about why it was a bad idea.
But those who ignored the advice of their elders and betters, and went ahead and did it anyway, made out like bandits.
By my math, this simple portfolio is up 1500% over the past 10 years. A dollar invested then gets you $16 now.
The boring portfolio of 50% S&P 500 /zigman2/quotes/209901640/composite SPY +3.18% and 50% long term Treasury bonds /zigman2/quotes/201786083/realtime VUSTX -1.31% ? Just 200%. A dollar gets you three.
Supposedly, this strategy is a route to disaster. These funds are only supposed to give you three times the movement a day. They’re not designed to be held long term.
So why did this work?
To understand better I spoke to Sylvia Jablonski, head of capital markets at Direxion.
And she started by saying, yes, actually, she is aware of clients who have used this strategy and held these funds long-term.
And yes, she says, this strategy worked really well last decade. (Incidentally, if you want to see incredible performance, she says, look at the Direxion Daily Technology Bull 3x ETF /zigman2/quotes/206926369/composite TECL +10.76% , which turned $1,000 into $21,000 last decade.)