Summary
This strategy is 3x leveraged and very risky. To tame its volatility, we suggest combining the strategy with others into a meta-portfolio. An example of such a portfolio is our All-Stars Leveraged.
- Objective: 3x leveraged growth
- Type: mean-variance optimization strategy
- Invests in: leveraged ETFs tracking stocks, treasuries, gold
- Rebalancing schedule: weekly w/ possible daily exit
- Taxation: 100% short-term capital gains
- Minimum account size: $5,000
Mach-3 aims aims at aggressive investors wishing beat the S&P 500 while limiting the losses in market downturns. To achieve its objective, the portfolio determines the current market regime using our Market Vane signal. In bullish regimes, the strategy invests in triple-leveraged ETFs representing various U.S. stock market indices. In bear markets, the strategy invests in leveraged ETFs representing U.S. treasuries and gold.
Mach-3 rebalances weekly, typically adjusting the weights of only three ETFs. However, in fast-moving markets, it may exit the bull-market strategy any day. This schedule equates to moderate maintenance requirements, compatible with a busy lifestyle.
Performance
This table shows the portfolio’s key performance metrics over the course of the simulation:
The following chart shows the portfolio’s historical performance and drawdowns, compared to their benchmark, throughout the simulation:
This chart shows the portfolio’s annual returns:
The following charts show the Monte-Carlo simulation of returns and drawdowns, the portfolios 12-months rolling returns, and how the portfolio is tracking to its benchmark:
Asset Allocation
The portfolio last required rebalancing after the exchanges closed on @last-rebal@. Due to fluctuations in asset prices, the exact allocations vary daily, even when no rebalancing occurred. The current asset allocation is as follows:
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Strategy Rules
The operation of Mach-3 can be summarized as follows:
- in bull-markets, trade leveraged ETFs tracking the S&P 500, Nasdaq-100, Dow-Jones Industrial Average, Russell 2000, S&P MidCap 400, and S&P SmallCap 600 indices
- in bear-markets, trade leveraged ETFs tracking U.S. Treasuries with 7-10 year and 20+ year maturity, and gold
- switch between bull- and bear-market regimes based on TuringTrader‘s Market Vane signal
- evaluate the performance of various asset weightings over a lookback period of approximately three months
- rebalance every week, picking the combination with the best modified Sharpe Ratio
Mach-3 is closely related to LogicalInvest’s Universal Investment Strategy. We enhanced the strategy by adding more assets, improving the asset ranking in times of negative returns, and switching between separate bull- and bear-market strategies.
Diversification
Mach-3 fully invests in one or more broad indices tracking the U.S. stock market in bullish markets. During bear markets, the portfolio switches to the safety of U.S. treasuries and gold. With these properties, Mach-3 is well diversified in terms of company risk. However, the strategy typically invests in only one asset class, and relies on serial diversification to switch between asset classes.
Returns & Volatility
Mach-3 beats the S&P 500 benchmark in most years and shows only brief periods of underperformance. The mean-variance optimization helps to manage portfolio volatility, while the market-regime filter helps to avoid deep drawdowns.
The strategy’s management results in a beta of approximately 1.5. While this notably amplifies the daily stock market volatility, it is still a 50% improvement over an unmanaged investment in a leveraged stock market position.
In summary, Mach-3 delivers most of the desirable upside of geared ETFs while successfully limiting risks to levels bearable for retail investors.
Account & Tax Considerations
With its 3x leverage, Mach-3 is a very aggressive strategy. Investors should not take this level of leverage lightly and always consider the strategy’s tail risk. In our opinion, Mach-3 is best used in the context of meta-portfolios, similar to our All-Stars Leveraged.
Mach-3 trades frequently and regularly triggers taxable events. The portfolio rarely holds assets long enough to qualify for long-term treatment of capital gains. However, because of the portfolio’s massive upside over buy-and-hold, Mach-3 may still add value to taxable accounts.
Mach-3 makes use of 3x leveraged ETFs, which are considered high-risk instruments. Many brokerages require signing additional disclosures before allowing investors to use these instruments in their accounts. Because we use these products in tandem with our proven market-regime indicator, we believe our use of these instruments to be responsible.
Mach-3 invests in no more than three ETFs at a time. The strategy should function as intended with as little as $5,000 of capital.