r/letfs
Risk On/Risk Off: UPRO/defense
Author seeks feedback on a leveraged SPX satellite strategy using UPRO for risk-on and defensive ETFs to mitigate severe drawdowns.
- The strategy aims for high CAGR by leveraging UPRO during risk-on periods.
- Incorporates defensive assets like KMLM and ZROZ to mitigate severe drawdowns and avoid long recovery periods.
- Author doubts SPX will continue its 15-year outperformance over the next 1-2 decades.
- Backtested bear market rules might be overfitted and fail in future unprecedented market conditions.
Opinions on this satellite? It backtests well, but to be honest I don’t trust that SPX will continue to outperform over the next 1-2 decades like it has for the last 15yrs. Also, bear markets won’t be just like they were in 2000, 2008, etc. I am going for high CAGR but not ridiculous 80%+ drawdowns with 10yr+ recovery. My idea is based on backtesting, however the bear market drawdown rules are modified based on my own logic/what makes sense to me. I’m not great at backtesting those, and if I were, those would probably be extremely overfit.
What do you think of the logic? Would you tweak anything? What is a realistic CAGR if executed well over the next 30 years?
The following is the result (in part) of a few rounds a feedback from this sub. I am grateful for that, and I hope some would be willing to take another look:
6% satellite (roughly $75k) (never mix with main non-leveraged portfolio). Already seeded with $15k.
SPX 200d sma 3% bands (close, trade on open next session). Risk on: UPRO. Risk off: 50% KMLM 50% ZROZ (rebalance when one reaches 60%). 20%+ SPX drawdown: 1/3 each KMLM, ZROZ, and BTAL (rebalance when one reaches 50%). 30%+ SPX drawdown: UPRO until back above 20% SPX drawdown. There could be multiple dips this exploits (repeat taking profits) during the same bear market via short term risk on/initial defense switching.
After Satellite fully seeded, if 40%+ SPX drawdown, switch contributions from main portfolio to UPRO until SPX recovers back to 30% drawdown.
For context:
Main portfolio (comment if you want)
20% SPX
6% AVLV
6% IJR
17% AVUV
6% VNQ
6% AVDE
6% DFIV
6% VSS
6% AVDV
6% AVEM
10% BND
5% T-bills
Thank you!
I swap to a golden butterfly portfolio during risk off. I am now using a 1% band (changed this recently), and I sell off the UPRO and wait 5 trading days before buying into the new portfolio.
On: 75% UPRO, 10% RSSX, 6% ZROZ, 3% each CTAP/MATE/RSIT
Off: 15% each RSSX, GLDM, VTIP, ZROZ, SGOV, 5% each CTAP, MATE, RSIT, HFMF, DBMF
Tests at 18.92% since 2003: https://testfol.io/tactical?s=lNdtWOBhwyi
I'm seriously considering adding TIP at 200 SMA as a secondary filter, but I'm undecided. It raises the CAGR to 25.35% since 2003: https://testfol.io/tactical?s=h7kZdwYs3Kn
\SPX 200d sma 3% bands (close, trade on open next session). Risk on: UPRO. Risk off: 50% KMLM 50% ZROZ (rebalance when one reaches 60%). 20%+ SPX drawdown: 1/3 each KMLM, ZROZ, and BTAL (rebalance when one reaches 50%). 30%+ SPX drawdown: UPRO until back above 20% SPX drawdown. There could be multiple dips this exploits (repeat taking profits) during the same bear market via short term risk on/initial defense switching.\
I honestly don't see the logic here. You said your system will not be able to exploit the bear market, but I think could also do quite the opposite. An arbitrary percentage from previous high is not a signal that can predict future market movement and the best portfolio for it.
Perfect market timing strategy doesn't exist. People use 200SMA strategy not because it times perfectly (quite the opposite, it always sell low buy high), but that it reduces the chance of irrecoverable losses. It's a deleveraging tool, not a hidden trick to outperform. With UPRO being a very small satellite of your portfolio, there is really no risk of ruin, and just periodically rebalance to refill the UPRO portion in a market downturn would make more sense.
I do think it can exploit bear markets. I am just providing caveats that it would be impossible to know how future bear markets will behave. Due to that I think backtesting the drawdown rules would be kind of worthless. That being said, I strongly believe there will be multiple 30%+ bear markets to come in my lifetime. I think the drawdown rules can profit. They are not 100% arbitrary. Maybe 50% arbitrary, lol. You are correct to say there probably isn’t a reliable signal that would allow for reliable exploitation of drawdowns.