So you like leveraged ETFs and you like Value. Can we combine them? Here I discuss the current options for a leveraged value ETF.
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Why a Leveraged Value ETF?
If you've landed on this page, hopefully leveraged ETFs require no explanation. If they do, go read this post first explaining how they work. Basically, we're paying a fee to increase exposure (and risk) in the portfolio within a single fund. I listed some examples of popular leveraged ETFs in this post.
And in doing so with stocks, e.g. with something like UPRO, a 3x S&P 500 fund, we also know we almost certainly want to diversify across assets and hold some bonds too, such as in the case of the famous Hedgefundie strategy, and like I showed here for TQQQ. In short, holding leveraged bonds mitigates the portfolio's volatility and risk when holding leveraged stocks.
But if you know anything about factor investing, we also know that we expect Value stocks to beat Growth stocks, and we get a convenient diversification benefit in overweighting them. That is, those independent equity risk factors tend to be uncorrelated to one another; they move at different times. As a result, I'd say it is reasonable to seek out a leveraged value ETF to further fortify your leveraged strategy. Others apparently feel the same, evidenced by the number of searches I get on this very website for such a product.
Unfortunately, at the time of writing, there is no leveraged value ETF. Period. However, several funds exist that may still fit the bill for a somewhat naive proxy.
IWDL – ETRACS 2x Leveraged US Value Factor TR ETN
IWDL is probably the closest thing we've got to a true leveraged value ETF. This fund launched in February, 2021. It seeks to provide 2x the quarterly performance of the Russell 1000 Value index and has an expense ratio of 0.95%.
Unfortunately, there are a couple immediate drawbacks with IWDL. First, you may have noticed that it's not an ETF at all. It's an ETN. Recall that ETNs carry their own unique risks compared to ETFs. Secondly, IWDL only has a terribly low $30 million in assets, meaning potential liquidity issues and risk of closure. Lastly, it's only 2x leveraged, meaning you'd need a higher allocation of it alongside 3x funds.
UMDD – ProShares UltraPro MidCap400
UMDD from ProShares seeks to deliver 3x daily exposure to the S&P MidCap 400 Index. The fund launched in 2010 but still only has about $50 million in assets.
While this may sound like a simple leveraged mid cap fund, the earnings screen from the underlying S&P index conveniently provides positive loadings across the Value and Profitability factors. We also obviously get exposure to the Size factor by holding mid caps. One downside to consider is that the greater volatility of mid caps means volatility decay of the fund is going to hurt worse.
UMDD has an expense ratio of 0.95%.
UDOW – ProShares UltraPro Dow30
UDOW from ProShares seeks to deliver 3x the daily returns of the Dow Jones Industrial Average. This fund launched in 2010 and boasts nearly $1 billion in assets.
UDOW and UMDD have about the same Value exposure, but UDOW has greater loading on Profitability, as well as a slightly positive loading on the Investment factor.
An obvious downside of this fund is that at the end of the day, the Dow is just a price-weighted index of only 30 arbitrarily chosen large cap companies, which is pretty strange. As such, it does not provide well-diversified exposure to U.S. large caps.
UDOW has an expense ratio of 0.95%.
Conclusion – Where To Buy These Leveraged Value ETFs
These leveraged products should be available at any major broker. My choice is M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Be sure to read up on the potential pitfalls of using leverage before blindly buying in. Again, leveraged ETFs are better suited for experienced investors. Remember that using leverage – especially in the form of leveraged ETFs – increases portfolio risk and the potential for greater returns, but also the potential for greater losses. Do your own due diligence and read the fine print on these products.
Do you employ a value tilt in your leveraged strategy? Let me know in the comments.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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