Triple X returns, how do levered ETF work for (against) you!

One of my students in Finland (Aalto University) asked me a simple (enough) question this winter...

Why would any young person not invest in a levered ETF?

My first inclination was to agree (I still do)... I  did mention that because of compounding the long-term returns would not be exactly 2X or 3X those of the benchmark index. I was not sure how big of a discrepancy this would be so I decided to do some work. I chose UPRO, the well known ETF that aims to give 3X the return of the SP500. It began trading on 6/25/09. Conveniently that is right after the worst of the crisis.

The following chart shows the results of investing $1,000 in both, from 6/29/09 - 1/10/2013.
SP500=60%
UPRO=235%
The winner is... well, this is an easy one. More than XXX, UPRO is almost 4X!!! I don't think I need to point out anything about UPROs volatility

Data from yahoo finance

 So what if we had had a bad few years? I reversed the daily returns and added them in the chart below... The lines "BEAR" show what would have happened to an investor if every return had been the opposite of what it was (a 1% gain turns into a 1% loss). The "Bull" lines are the same as the chart above.
Toting up in this case


Bull SP500=60%
Bull UPRO=235%
Bear SP500=-44%
Bear UPRO=-89%

The winner is...hard to tell...

Data form yahoo finance

I will never say this in my classroom, (too afraid someone will sue me): I am still for the levered way... If you are 20 and have nothing to lose... had you started with $476 on 6/25/09 in UPRO, you would be in the same place as someone who invested $1,000 in SP&500. Young people can worry about re-balancing their portfolios later.

Data from yahoo finance

 It is a probabilistic game... This is from a previous posting on this blog... if the percentage of winners is loaded on my favor, why not take advantage of it and go XXX?

Data from Thomson Reuters

Peeing in bed

Shortly after Brazil's finance minister Guido Mantega famously declared to the Financial Times in 2010 that we were in the midst of a global currency war, James Rickards published his best seller book (same name).  The rest is history, not a day goes by when the press does not mention the term...

The following chart (from LexisNexis) shows some interesting trends: The term "currency wars" was not on the world's mind in 2009. In fact only 36 articles used this term during the year. Guido Mantega made the term very popular in 2010. Its popularity decreasing year after year... Until... the new Japanese government decides to take action early this year. If this trend continues, it will be a record

The problem with all of this is what Francesco Guerrera from the WSJ reports, "Devaluing a currency," one senior Federal Reserve official once told me, "is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess."

I think the problems that Brazil, China and Japan have are a lot more serious. It is going to take a big diaper!

Borrowing from Paul to pay Peter

Who would have thought...

It used to be a bad thing. Borrowing money to pay dividends...

It now makes sense... Last year Pepsi borrowed $2.75 billion USD at record low rates... so low that they will use the money to pay dividends instead of repatriating cash from overseas...

Do we need to rethink our tax system or what!

The three-year debt pays 45 basis points above similar-maturity Treasuries, the 10-year debt offers a spread of 80 basis points and the 30-year bonds yield 95 basis points above Treasuries, Bloomberg data shows

That is better than Australia, Austria, Belgium, France, New Zealand just to mention a few...

Very recently,CNN reported that the wholesale giant Costco borrowed $3.5 billion USD for the same purpose. Other companies are taking note and following.

MRIC > BRIC

Take a look at this great FT piece.

Just two years ago, my Financial Developments in Latin America class was fiercely debating the future of Mexico. China had completely overtaken Mexico as a manufacturing location. Brazil had taken Mexico out of the global political scene. There is no "M" in BRICs. Drug cartels were making Mexico famous for all the wrong reasons. The US downturn was making things all the worse. Mexico was famously feared to become  failed state by some in the US government.

Slowly but surely, the world was changing, the same forces that were dooming Mexico are now the wind beneath its wings.  A very nice account by Adam Thomson of the Financial Times on how Mexican businesses are overcoming obstacles to establish themselves in the heart of America.

No longer exporting cheap materials. Now the question is, can Brazil compete with Mexico