Triple leveraged ETF

In this article, we explore whether it makes sense to incorporate leveraged ETFs into static and dynamic long-only asset allocation strategies. Leveraged ETFs promise amplified exposure to the underlying asset, offering the potential for significantly higher returns during favorable market conditions. However, this comes at the cost of much higher volatility, path-dependency, and the well-known issue of volatility decay, which can lead to substantial underperformance over longer periods. Our objective is to examine if — and how — leveraged ETFs can be systematically integrated into portfolio construction so that their benefits can be captured while mitigating their inherent risks.

Leveraged ETFs (such as SPXL – (Direxion Daily S&P 500 Bull 3X Shares) offer amplified exposure to the S&P 500, promising high returns but exposing investors to volatility drag caused by daily rebalancing. This effect can significantly erode performance over longer horizons, particularly during periods of elevated market volatility. Inspired by recent research, The Volatility Edge, A Dual Approach For VIX ETNs Trading, focused on volatility-linked ETNs, we propose a volatility filter that adjusts ETF exposure based on the relationship between short-term realized volatility and implied volatility. By reducing exposure in high-volatility periods and maintaining it in calmer markets, this approach aims to harness leverage effectively while mitigating the most damaging drawdowns.