Leveraged ETF Investing

TL;DR

This paper uses Monte Carlo simulations to demonstrate that leverage via leveraged ETFs can boost long-term investment returns without substantially increasing risk, based on historical stock market data.

Contribution

It provides a quantitative analysis showing that leverage can enhance returns without proportionally raising risk for passive investors using leveraged ETFs.

Findings

Leverage amplifies potential returns in long-term portfolios.

Risk increase due to leverage is not significant over long horizons.

Simulations based on historical data support the benefits of leveraged ETFs.

Abstract

It is common knowledge that leverage can increase the potential returns of an investment, at the expense of increased risk. For a passive investor in the stock market, leverage can be achieved using margin debt or leveraged-ETFs. We perform bootstrapped Monte-Carlo simulations of leveraged (and unleveraged) mixed portfolios of stocks and bonds, based on past stock market data, and show that leverage can amplify the potential returns, without significantly increasing the risk for long-term investors.