When I first introduced this strategy, I mentioned how it could have been used following the recession from 2000 – 2002, that strategy can be viewed here. A new interest has been shown in this strategy following the 4% drop of the S&P that occurred in the month of February because of the events that took place on February 27, 2007. Investors are finally realizing that they had taken on too much risk and now they are rebalacing their portfolios. Another new issue is how correlated the global markets are now, most investors thought that by investing in International companies that they were protected from negative news domestically, however, last Tuesday has proved otherwise.
Over the past month the S&P 500 has declined 4%, while aggregate bonds has increase around 1.25%. If someone where to enter into the leveraged ETF strategy on February 1, this is what their portfolio would have looked like today, March 3, 2007. I will also provide a comparision of what your portfolio would have looked like if you were only invested in the S&P 500 ETF.
SSO – Ultra S&P 500 Proshares – 563 shares bought at $88.73 ($49,954.99)
AGG – iShares Lehman Aggregate Bond – 501 shares bought at $99.76 ($49,979.76)
Total invested: $99,934.75
Leveraged ETF Portfolio (March 2):
SSO – Ultra S&P 500 Proshares – 563 shares @ $81.50 ($45,884.5)
AGG – iShares Lehman Aggregate Bond – 501 shares @ $100.65 ($50,425.65)
AGG Dividend on 501 shares @ $.393 ($196.90) – February 1
AGG Dividend on 501 shares @ $.394 ($197.40) – March 1
Total Portfolio Value on March 2: $96,769.69 (-3.23%)
If an investor was strictly invested in the S&P 500 ETF, their portfolio would look like this on February 1:
SPY – SPDR – 693 shares at $144.15 ($99,895.95)
This is how it would look on March 2:
SPY – SPDR – 693 shares at $138.67 ($96,098.31)
Cash – $104.05
Total Portfolio: $96,202.36 (-3.80%)
While that difference does not seem to make that huge of a difference in the long run, should the US economy experience a period of slow growth and perhaps dip into a recession, an allocation to bonds while being invested in stocks, as shown in my previous post about utilizing ETFs to lower your risk. Although in the previous example there was an allocation to a money market fund, in this example, I chose bonds to show how an allocation to bonds would be an ideal situation for the investor.
I will be doing a further analysis on utilizing new ETFs, such as commodities and real estate to further lower the risk in your portfolio and generating market beating returns.
This analysis did not take into account taxes or commissions.
Posted by: Bryan