r/letfs
Tested 'just rotate into whatever performed best lately' on 14 strategies (1992-2026). It kept ~22% in a 3x strategy and rode it straight into the blow-up
Backtesting shows rotating into top leveraged ETFs by trailing returns causes catastrophic drawdowns; risk-adjusted metrics are needed.
- The momentum ranking signal is statistically real, as top-performing strategies tend to keep winning for a while.
- Raw return ranking buys fragility at the top, disproportionately holding 3x strategies into catastrophic drawdowns.
- Naive momentum rotation underperforms simple equal-weight blends on a risk-adjusted (Sharpe) basis.
This idea keeps resurfacing here in different costumes, most recently in the optimized return-stacked mixes: run several strategies, hold whichever did best over the trailing year. Strategy momentum.
We backtested the naive version, no look-ahead: 14 strategies (a few leveraged), re-rank monthly by trailing 12m return, hold top 3 equal weight, 1992-2026.
The ranking signal is real, no arguing with that part. Top-3 bucket ~19.9%/yr, bottom-3 ~7.3%. Winners do keep winning for a while.
The portfolio is still bad though. It never beat the plain equal-weight blend of all 14 on Sharpe (best variant ~1.17 vs ~1.27 for the blend), and the reason is pure r/LETFs material: the highest trailing return is disproportionately a leveraged strategy late in its run. The rotation held a 3x strategy at ~22% average weight, in 254 of 389 months, directly into its catastrophic drawdown. Raw-return ranking is a machine for buying fragility at the top.
What worked instead: walk-forward re-weighting on a rolling window with a risk-adjusted criterion (Sharpe, Sortino, min-DD...) and a hard per-sleeve cap. Optimize in the window, hold out of sample, roll. Fun detail: set the criterion to max-CAGR and it quietly rebuilds the chasing problem, the weight cap is the only thing saving it.
Full mechanics and tables: https://bestfolio.app/blog/walk-forward-portfolios-deep-dive
If anyone here rotates LETF sleeves by recent performance (SSO/UPRO/TQQQ style), would genuinely like to hear how 2022 treated it.
I think everyone here would really appreciate it if you would stop using AI to write everything. The annoying stupid click baity LinkedIn style prose just leaves the bad taste of incompetence. If I can't even trust that you are capable of writing your own posts, without all the slop, how can I trust your analysis, if it's even yours?
I'm at the point of barely even opening your threads anymore it's so bad.
Did you use AI to generate this post? Your article links to content that requires a subscription, correct?
Your article includes a sentence "The tool lives at Walk-Forward Optimization (Pro)." When I click on it, I'm asked to login.
Was this Reddit post written by AI?
Was the article this Reddit post links to written by AI?
Does the walk forward optimization require a subscription?
It's not your writing style, it's AI. Why not take the recommendation instead of getting defensive. I'm not the only one that feels this way.
I take the recommendation for sure, but I'd also advise to check the content before checking the style... As I explained here before, using AI to revise writing is important for all non-native speakers. Which is my case, like plenty here.
I can try to make less cheesy/catchy titles and leave the grammar mistakes in the post, will I get blamed for poor writing then?
How’s this?
https://testfol.io/tactical?s=cJFIizMIMH4
Your English is fine. We can tell when it's you writing and when it's your Claude instance. You sound much better than Claude. Claude's prose in your article is too terse for all but >2sd people with backgrounds in statistics or machine learning.
OK. Fair point. I'll try to do better, and take it from the ground up...
You're sharing some knowledge in the hope of gaining paying subscribers.
Clearly... But also because I like exchanging knowledge, debate, and actually learn from comments. That's why I am here, and I suppose this is why you are here as well?
I'm not here to read prose from Claude, and this isn't your marketing forum.
Honestly, this is more or less what it ends up doing - but to have good results you need to take a longer period into account. dual momentum would look back 12 months max and decide on momentum only, here we look 3y+ and decide on whatever we want, but often Sharpe / Sortino.
Thanks that makes sense - it's important to use a longer lookback and if dual momentum is a way to introduce risk management may as well use something that does that more directly like sortino.
Exactly. Dual momentum bolts on risk management as a blunt binary switch, in or out on a 12m window. If you're already doing a walk forward re-weight you can just hand Sortino the job directly and it deals with the downside asymmetry continuously instead of flipping the whole thing to cash at once. Then the per-sleeve cap does the "don't ride the 3x off a cliff" part. Feels cleaner than stacking two separate momentum layers that are sort of fighting each other.
Thanks, appreciated! Actually my conclusion slightly differs from AS' one - with the right parameters (longer lookback, Sharpe or Sortino as optimization criteria) and the right strategies (not 100, but 5 to 8 well chosen ones, which means not X variations of the same thing) it really bring huge value.
Oof downvoted for asking a genuine question. u/laurenthu maybe I'll ask these things on your posts in the AllocateSmartly blog instead in the future!
Don't read too much into the votes, your questions were some of the only real ones in the whole thread. The dual momentum angle you raised is genuinely worth a proper writeup, the longer lookback plus a risk adjusted criterion is exactly where it gets interesting. Ask away wherever you like, here works fine too.
Sometimes it's hard to have a serious conversation here. Part of the game, I suppose...
Good post: "TQQQ to the SKY, all in on 9Sig, I'll be rich tomorrow"
Bad post: anything else...
Yeah definitely. I do find your posts genuinely really useful. I get that people need to be wary of people just trying to sell things. But this isn't that because you always give full details of what you've done and found in a way that someone could implement themselves. Ultimately it's always going to be people who are building apps/businesses that are going to be more likely to do more in depth analysis.
Appreciate that, genuinely. And yeah, that's the honest tradeoff: the only reason I can run these backtests at all is because I built the tooling for my own use first, so of course I'm going to point at it. But the writeups are deliberately full enough that you can rebuild the whole thing in your own backtester and never touch anything of mine. If the conclusion is "equal weight + Sortino + a hard sleeve cap beats raw-return chasing," that's true whether you run it on my stuff or your own. Thanks for actually reading before judging, it's rarer than it should be here.
Another interesting post by OP. At 100% allocation to 3x LETF, a blow up expected eventually. It's only a matter of when.
Would like to know if you've tested the top 1/2/3 EW using 50/50 target AA
I'm currently running a top 2 EW rotation strategy on a list of 3X LETFs ranked by their mean 6/12m relative MOM. Target AA is 50/50
Each LETF has it's own standalone strategy signal.
So if the current ranking is EWY, SOXX, XLK.....but EWY signal is off, I'd buy 25% SOXL + 25% TECL.
The rest 50% is my diversifer sleeve which hold a bond and real asset etf. I use max volatility cap (7.5 to 10%)
Current Holdings (Target Allocation)
- 25% SOXL
- 25% TECL
- 15% GDE (~real asset)
- 35% VCIT (bond)
The DIV sleeve is also based on rotation, each with their standalone signal. 5 etfs each for bond and real assets
For rebalancing, I'm considering using a modified Sig.
- Quarterly
- 7% SL
- 50% spike
- 50% buy limit
Your thoughts/suggestions?
Very interesting construction, thanks for laying it out fully. And yes, 100% in a top-N of 3x LETFs blows up eventually, that part wasn't subtle...
No, I haven't tested the 50/50 version yet - our test rotated whole strategies, not single LETFs, and sat fully invested. The funny part though: the naive rotation that blew up only held the 3x at \~22% average weight. Your rotation sleeve alone is 50% in 3x products, so the AA split isn't what's protecting you. My read is the real protection is your vol cap - at 7.5-10% target you'd get forced way down from that LETF weight exactly when it matters, and that's much closer to what worked in our walk-forward runs than the momentum ranking itself.
I'd watch the ranking itself though. Top-2 by 6/12m momentum on a 3x list will pick two versions of the same trade most of the time - SOXL + TECL is basically one bet underneath, same handful of mega-caps. EWY showing up in your ranking is the healthy sign there. And careful with GDE in the diversifier sleeve - it's 90% S&P 500 plus 90% gold futures, so your "50% diversified" half quietly adds another \~13.5% equity. Your true equity beta is higher than the 50/50 label suggests.
Honest question on the modified Sig: what does the 7% SL act on? A 3x LETF moves 7% on a random Tuesday, so per-position stops with quarterly reviews... something has to give there. Give me your exact LETF list and I'll run the 50/50 capped top-N through the same harness, curious myself what the vol cap does to it.
Go back and read his first answer to my original comment and then read his subsequent comments.
Do you think his first answer was honest?
The first hyperlink directed to an article is free, the second directed to a backtest is behind a paywall yes. Most of his articles and findings are free to use but the work he puts into creating a backtested ranked database is pay to use. Kind of like what testfolio is implementing with certain features behind a paywall. With that being said, you can look at strategies and the leaderboard with a robust filter system. I’m not saying to buy it but it’s a cool database tool like composer.trade yet has less overfit/more conventional strategies