Leverage Europe and integrate risk parity strategy into world portfolio
"Leverage For ETF Autists(HFEA)" aka Risk Parity Strategy with Leveraged ETFs.
(What HFEA is at all I have explained in another post).
@SharkAce had the idea the other day to map a leveraged world portfolio through MSCI USA x2 and Stoxx50 x2. Sounds good for now. Here's my little deep dive on it (and there's a little 2008 action in there too):
On the way to the leveraged world portfolio we have to do 4 quests:
1. ideal weighting of EU stocks to bonds.
2. ideal weighting of US stocks to Treasuries
3. weighting US to EU
4. FTSE All-World as basis?
Two things in advance
1. the only thing we really care about in this strategy is the maximum drawdown and the compound annual growth rate(CAGR). You can keep an eye on the volatility, but that's not really important.
2) I have only worked with ETFs that are tradable in Germany, so no WisheitsBaum ETPs or Burger Land ETFs.
Is this possible and if so does it make sense?
Spoiler: Yes
Risk Parity with leverage in simple words: price of stocks and bonds behave uncorrelated to a certain degree. Thus less drawdown and more returns.
Additionally we want to weight the EU part higher for diversification. We keep in mind the maximum drawdown of the FTSE All-World in March 2020 of about -19% and the EU share of 16.9%, so we aim for similar values for our world portfolio pie.
Emerging markets should not interest us at all for now, as we are completely focused on the US and the EU as a factor.
Our ingredients for the cake:
-2 eggs
- Amundi ETF Leveraged MSCI USA Daily UCITS ETF EUR
- iShares USD Treasury Bond 20+yr UCITS ETF USD (Acc)
- Lyxor EURO STOXX 50 Daily (2x) Leveraged UCITS ETF - Acc
- Lyxor Euro Government Bond 15+Y (DR) UCITS ETF - Acc
Quest 1: Europe. Find out which ratio of stocks/bonds is best
Initial situation: 10,000€ single investment, savings plan 200€ monthly. 2007-2017 and 2010-present.
Benchmark: Stoxx Europe 600 (because Stoxx50 is just garbage, my grandma would beat it).
Weightings of 90%-50% Stoxx50 fly right out, they have much stronger drawdowns than the benchmark, both in 2009 and 2020 and perform worse or the same.
So we look at weightings of 45%-10% Stoxx50
2007-2017 auuuaa, vodka and beer, auuaaaa
Benchmark: CAGR: 4.35%, max drawdown: -33.8%.
Here 30/70 performed best with: CAGR: 5.33%, max drawdown: -13.9%, volatility: 15%.
2010-today Corona Time
Benchmark: CAGR: 6.07%, max. drawdown: -21.6%
Winner: 45/55 with CAGR: 7.59%, max. drawdown: -20.6% Vola: 15.6%
Chart 2007-2021: https://i.imgur.com/3lswi2E.png
Drawdowns: https://i.imgur.com/3zjhnjC.png
So we decide to use the golden mean: 40/60 Stocks/Bonds and from now on we only look at the period 2010-today, since the other funds did not exist before 2010 and the comparison would otherwise be meaningless. There we get:
CAGR: 7.35%, Drawdown: -18.6%, Vola: 14.4%.
Quest 1 passed.
Quest 2: USA. Find out which ratio of stocks/bonds is best.
Initial situation: 10,000€ one-time investment, savings plan 200€ monthly. 2010-today
Benchmark: FTSE All-World: CAGR: 8,48%, max. drawdown: -19,1%
I compared everything between 90/10 and 10/90 stocks/bonds.
Here 60/40 performs best
CAGR: 22%, max. drawdown: -19%, volatility: 13.8%
Chart: https://i.imgur.com/W6iBH3M.png
Drawdowns: https://i.imgur.com/Ydv7hgb.png
Quest 2 also passed.
Quest 3: World. Find out which USA/EU ratio is best.
Totally don't care. We already have the winners of Quest 1 and 2. Both have the same drawdown and a higher CAGR than the FTSE. So no matter what ratio we put them in, we will always outperform the FTSE and underperform the US HFEA portfolio. So the question is how big should our EU share be in the portfolio. Logically, the CAGR will be between 7%-22%.
Quest 4: FTSE All-World as base yes/no
Since the US/EU portfolio has performed better than the FTSE and worse than the US only portfolio, the answer is individual. No matter what your EU allocation is, it will always outperform the FTSE.
Here is an example of what I have found to make sense:
Variant1 FTSE+US/EU HFEA factor: 50%+35%US/15%EU: CAGR: 11.1%, max. drawdown: -18.2%, Vola: 13%, EU share: ~23%.
Let's now compare this with 50% FTSE/50% US HFEA with: CAGR: 12.3%, max drawdown: -17.9%, vola: 13.8%, EU share: 8.4%.
Conclusion:
Does it make sense to do this? Yes. We were able to increase the EU share to 23% and outperform the FTSE growth rate by ~30%.
Chart: https://i.imgur.com/vK7rBEf.png
Drawdowns: https://i.imgur.com/e9iFw7s.png
Maximum yearly loss: https://i.imgur.com/1z13f3R.png
But is all this shit worth it? Nope. FTSE+US HFEA performs better and is easier. The difference to the portfolio without EU are -1.2% and a huge ass of effort to calculate that (70% of 50%, then 60% of that, then 60% of that again, just so you know how big 1 ETF share should be. And that x5 for all ETFs. FML.) Then rather do without the diversification in regions and diversify over time. Leverage properly for the first 10 years, at higher risk and then drive lower and lower risk over the next decades with higher capital by taking the leverage out and then shifting into bonds. Not like the dividend strategy, where there is the same risk and no return from start to finish.
And before the question comes again, why not everyone does this. Because most simply have no bock to deal intensively with anything. They want to open youtube and learn from @finanzfluss and @AKTIENMITKOPF which ETF and which gaming stock they should buy and then it's the weekend. No hate, I watch them too. In addition, it is for private investors simply still a relatively new concept. We are just no hedges and are dependent on ETFs. Of which there are 2 in Germany of which I know. The oldest jellyfish I have found was December 2017* where someone has tried with a demo account and 3 people have reacted in the thread on it... So if you wonder why not all do, then ask yourself why you have just heard the first time.
That's it from me you robbers. Have a nice sunday. Follow me on TikTok and buy my coin. Cheers to you!
Sources:
https://www.optimizedportfolio.com/hedgefundie-adventure/
*https://community.ig.com/forums/topic/3072-leveraged-etf-risk-parity-portfolio/
