In the past, we have tested TQQQ/UPRO on simulation data and real data. Today, I encountered an interesting video talking about using volatility indicators to decide when to hold leveraged ETFs. Here, I am just recording its link and its main result. We may come back and add more discussions in the future.
Update 2024-07-08
Personally, I don’t completely trust volatility indicators that much. I prefer staying in the market with a right re-balance strategy. I see a strategy online, which is about rebalancing between TQQQ and BTLA (an ETF aiming for stability) annually to weather extreme volatility. When backtesting on last 3~5 years, this strategy seems to outperform holding TQQQ alone. Here is more analysis.
I created 3 portfolios, where portfolio 1=holding TQQQ 100%, portfolio 2=holding 50% TQQQ and 50% BTLA, and portfolio 3=holding 70% TQQQ and 30% BTAL. We can see that portfolio 3 has similar performance with portfolio 1 while having about half volatility. Portfolio 2 is more stable but also less return overall.
However, portfolio 3 still has -47.32% worst year and -48.10% max drawdown. So next I am trying different ratios between TQQQ and BTLA. In the new comparison, portfolio 1= 70% TQQQ and 30% BTAL, portfolio 2=65% TQQQ and 35% BTAL, portfolio 3=60% TQQQ and 40% BTAL.
But we see that we have to trade stability with return. Personally, my comfortable ratio of TQQQ is between 65%~70% because the max drawdown is less than 50%, some threshold I can bare with.
I also find some alternative to BTAL because its return is too flat. I believe JEPI is a better option because it has monthly dividend to grow itself. hence much higher total return over long term. The largest drawdown of JEPI is about 1-125/140=10%, while that of BTAL is even higher 1-75/87=14%.
To conclude, I’ll stick to 65% TQQQ and 35% JEPI in the future to have a good return and stability balance.
The portfolio backtest tool I used is available at https://valueinvesting.io/backtest-portfolio