Using Leveraged ETFs With Mean-Reversion Strategies

In this article we analyze the performance of our mean-reversion strategies with three leveraged ETFs. Returns increase along with risk as expected.

The three leveraged ETFs that track S&P 500 total return are: SSO, UPRO and SPXL. Below is a table that shows the date of inception and the leverage.

ETF Inception Leverage 
SSO 06/21/2006 X2
UPRO 06/23/2008 X3
SPXL 11/05/2008 X3

 

We offer signals of four mean-reversion strategies for SPY ETF. Using leveraged ETFs the performance of these strategies may increase substantially but at a proportional increase in risk as measured by maximum drawdown. Therefore, there are increased risks involved when using leveraged ETFs besides other known effects such as volatility decay that affects performance in the longer-term.

Below is a table of key performance parameters of our flagship mean-reversion algo PSI5 (MR5) in SPY and SSO (X2) ETFs from 01/03/2007 to 11/15/2017. Commission is $0.01 per share and equity is fully invested.

Parameter SPY SSO SPY B&H SSO B&H
CAGR 10.7% 14.3% 7.8% 9.31%
Max. DD -25.2% -61% -55.2% -85%
Sharpe 0.68 0.46 0.34 0.24
MAR 0.42 0.22 0.14 0.11
Win rate 74.7% 72.9%
Trades 225 225 1 1
2008 ret +8% -27% -36% -67%

Below are the equity charts. Click on images to enlarge.

It may be seen that maximum drawdown is more than double in the case of SSO but CAGR is less than double. This is an effect of volatility decay due to 2008 crash. As it is shown below, after 2011 performance is more normal. We included the above example to demonstrate the high volatility effect mainly. Note that performance in 2008 is positive for SPY but highly negative for SSO. Again, this is due to high volatility effect.

Below is a table of CAGR performance for all four mean-reversion strategies in leveraged ETFs plus SPY from 01/03/2011 to 11/15/2017:

Strategy SPY SSO UPRO SPXL
MR0 9.8% 17.5% 25.8% 23.5%
MR1 9.8% 18.0% 25.4% 21.0%
MR2 6.7% 13.7% 20.4% 18.1%
MR5 12.8% 23.6% 36.2% 33.4%

It may be seen that during this period of lower volatility in the markets, leveraged ETF performance is approximately equal to unleveraged (SPY) times the leverage. UPRO has had the best performance in this period and for now at least it is a good choice for mean-reversion signals with leverage.

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Note that the mean-reversion signals are provided as an educational trading tool for informational purposes only and do not constitute investment advice. We do not warrant the accuracy, completeness, fitness or timeliness for any particular purposes of the mean-reversion signals. Under no circumstances the mean-reversion signals should be treated as financial advice. Before subscribing please read our Disclaimer and Terms and Conditions.

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Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

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