$SSO has compounded at 16% since its inception in 2006. A simulated FREE 2X daily S&P 500 ETF (no borrowing rate, no rebalancing friction, no slippage, no expense ratio) has compounded at 19.95%. LETFs cost much more than you may realize.
I've been using UPRO and SSO since 2024. I knew the expense ratios were high, and that the ETF providers have to pay slightly more than the overnight borrowing rate to get the exposure. But I always figured the cost is outweighed by the incredible returns. However, I wanted to see the math for myself - and it shocked me. Here's the annualized returns since 2006 of the S&P 500, $SSO, and a simulated $SSO that doesn't deal with any costs (pure 2X daily S&P 500).
SPY: 11.61% CAGR
SSO: 15.99% CAGR
Zero cost SSO: 19.95% CAGR
Looking closer, we see that the real world SSO has only provided about 35% of the CAGR increase that 2X daily provides. In the past 20 years, SSO holders have lost about 4% annually to the cost of capital/slippage and expense ratio. To me, that's ridiculous. I no longer think that doubling my volatility/risk/drawdowns for a potential marginal increase in CAGR is worth it. I'm blessed that I held SSO and UPRO from 2024 to today, but I can't justify it after learning this.
Furthermore, this example was from 2006 to 2026, when the average borrowing rate for SSO has been extremely low. Looking at a simulation from 1976-2026 (50 years), SSO holders would have lost about 6 to 7% annually compared to a pure 2X daily S&P 500 ETF. That's crazy.
The counterargument to my finding is this, in my opinion: Going from 50% stocks 50% cash to 100% stocks doubles an investor's risk/volatility. However, that investor only gained about a 30-50% increase in CAGR benefit. So you're only increasing your expected CAGR by 30-50% when going from 50% stocks to 100% but doubling risk. With SPY vs SSO, you are also doubling your risk, and your CAGR goes up by 30-50% as well. So if going from 50% stocks to 100% stocks is worth it (obviously, it is) then going from SPY to SSO must be worth it as well, right? I'm not convinced.
I got this idea to look at this from a "Rational Reminder" podcast with Ben Felix from PWL Capital. He interviewed professor Hank Bessembinder who studies LETFs. He wrote this paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5369417
The paper focuses on single stock LETFs, but the thesis holds true for LETFs that cover broad indices. The losses for index LETFs like SSO, UPRO, QLD, or TQQQ are much smaller than single stock LETFs, but they are still huge.
I got my numbers from testfol.io and their ? leverage tool. I tweaked testfol.io formula so that I could backtest a zero fee/cost simulated 2X S&P 500 ETF vs SSO.
What are your thoughts on all this? Am I wrong in some way? Were you already aware of this? Do you just not care?