Shorting leveraged ETFs pairs

Research on leveraged ETFs has explained some important characteristics of these products:

  • their negative exposure to volatility
  • the resulting possible value erosion for long term buyers

However, the research also shows that the value erosion is not systematic. Shorting leveraged ETFs by pairs does not necessarily produce a positive return. In trending markets with low volatility, the power of compounded returns dominates the effect of value erosion (click on image to access calculator).


A random walk down wall street (Malkiel)

First published in 1973 and revised nine times since, this classic offers practical advice that is backed by no non-sense explanations.

On the theory side, you will find this book useful if you are looking for an introductory explanation on these topics: modern portfolio theory and CAPM, efficient markets, random walk.


Rebalancing or not ?

Should you rebalance your portfolio ? There are conflicting opinions on this topic. For David Swensen, author of “Unconventional success”, rebalancing imposes a disciplined “buy low, sell high” strategy. Mr. Swensen is known for his impressive track record at the head of the Yale endowment. For John Bogle, “rebalancing is a personal choice, not a choice that statistics can validate”.

You can see for yourself the effects of rebalancing in our portfolio analysis tool. We have added an option that makes it straightforward to compare it against buy-and-hold.


The misbehavior of markets (Mandelbrot & Hudson)

mandelbrot

Mr. Mandelbrot explains the shortcomings of modern finance theory in simple terms. Even though no practical alternative is given, the book was remarkably prescient (published a few years before the 2008 crisis) and encourages research into new models, possibly based on fractals.


The Bond Book (Annette Thau)

A splendid introduction to bonds. The book is well structured and makes a great reference.

This text provides the essentials for understanding bonds: yield calculation, interest rate risk, credit risk, and the pros and cons of most bond investments: treasuries, munis, GNMAs, corporates, zeros, bond funds, money market funds.