r/LETFs

recently applied 9sig into portfolio. long bond seems stupid to me. am i the only one? the inverse relationship of stocks/bonds is no longer reliable, wont be again without massive structural reforms, yadda yadda yadda. but i feel i havent seen anyone discussing inverse bond fund with their TQQQ. at -1x its still low volatility, and works well as a low risk/low reward cash pile. in terms of being a 9sig modification, it still performs the role that its supposed to do in 9sig, which is preserve capital for future opportunity. and given the low volatility im going to say the quarterly review/rebalance is fine for making a short/long change at some point. curious to know if im missing anything. is there some other role about AGG/bond sleeve that's not covered here? i get no dividends obviously, and fee is higher, but otherwise it sure looks like it does the same thing. the higher fee means this is something you dont ignore, you look at it every quarter. but you already do that for TQQQ. what would kill it? a bond rally obviously. but sure seems like over the past few decades those are announced in advance by Fed/treasury. never say never, but seems like bonds just dont move fast enough to really hurt you in only 90 days. not without something happening that's front page news: major war, pandemic, QE, etc. thoughts?

Above are the results from 1950 to today (Oct 2026) of three simulations:

• The S&P 500 (dividends reinvested, 0.09% expense ratio). - Blue
• A simulated SSO with realistic borrowing costs and expenses. - Red
• A simulated SSO (2X Daily S&P 500) with no borrowing costs and no expense ratio. - Yellow

Here are the CAGR, MAX Drawdown and Sharpe of all.

• S&P 500: 11.69% CAGR, 55.14% Max DD, 0.52 Sharpe
• Total 2X return of S&P 500: 23.38% CAGR
• Simulated SSO (with costs) 14.48% CAGR, 88.73% Max DD, 0.46 Sharpe
• Simulated SSO (no costs) 21.63% CAGR, -83.63% Max DD, 0.65 Sharpe

DISCLAIMER: Before anyone gets emotional and attacks, I am NOT saying that people shouldn't buy and hold LETFs. I am simply hoping to help users of r/LETFs understand the costs of these funds.

You might be thinking, "well yeah it's not that much more than regular 1X, but that extra few percentage points in the long run clearly pays off because of compounding." You totally would be right from 1950-2026. However, please consider these points I'm about to make:

1. US stocks have had an unbelievable past 75 years. They have returned almost 12% for 7 decades, which is unbelievable. I for one, do NOT believe stock returns will be this high for the next 7 decades. The long term global average inflation adjusted return of stocks is around 5-6%.

2. Even with that incredible performance from 1950-2026, the realistic 2X daily only "beat" the market CAGR by about 3% per year, geometrically. (Far worse risk adjusted results.)

3. The true 2X CAGR of the S&P 500 would be 23.38% CAGR. The simulated zero cost SSO returned 21.63% CAGR. This means that roughly 1.5% per year on average has been eaten away due to the compounding effect that the daily reset produces. (Important: The compounding of daily resetting is not bad nor good, it is just a byproduct of daily resetting leverage.)

4. The underlying costs of an LETF like SSO, QLD, UPRO or TQQQ are the following:

   • Expense ratio (around 0.9%)
   • Fed funds rate plus roughly 50 basis points on top, to gain the leveraged exposure
   • Rebalancing costs (bid ask spreads, tracking error) - these are so small I won't include them.
   • The stated 1.5% annual daily rebalancing compounding effect or "drag" from #3 above.

When you add all that up, you get costs of roughly fed funds rate + 2.5% cost per year.

The compounding effect that the daily rebalancing has is overall (in my opinion) actually a good thing, not a bad thing. It greatly reduces drawdowns in downtrends, and increases upside gains in uptrends. However, you pay for those benefits in sideways, reversal trending markets. That is why the zero cost simulation still loses to the pure 2X CAGR of the S&P 500 by around 1.5% per year.

So all in all, in October 2026, the current excess return of SSO over the S&P 500 is:

• Whatever the market return (S&P 500) is, MINUS:
• 1.5% annual cost due to daily reset compounding effect.
• 0.9% expense ratio
• Fed Funds rate + 50 basis points = 4.25%
  • TOTAL EXPECTED EXCESS RETURN OVER THE S&P 500 OF SSO =
  • Market return minus 6.65%

Stocks have returned around 7-8% nominal globablly since 1901. This means that you're currently paying 6.65% annually to gain exposure to potentially 1 or 2% annual excess returns over the market. You're taking all the risk/downside, but gaining hardly anything back.

Before anyone gets emotional and attacks, I am not saying that nobody should buy and hold LETFs. I am asking that all users on r/LETFs understand the costs imbedded in these products before buying and holding or trading them.

What are your thoughts? If you disagree, please let me know why, and be CONSTRUCTIVE. I understand people on this sub will get defensive and love the leverage juice hardcore, but please be constructive.

Something worth checking on any multi year stock test, and I got this wrong in plenty of my own early ones.

You pick a universe, usually the current S&P 500 or the current Nasdaq 100, and you run a rule across ten years of history on those names. The list you used is todays list. Every company that dropped out of the index over those ten years, whether it got bought, went under, or just shrank out of it, is not in the test at all, because it was never in the list you started from.

What you are left with is ten years of history belonging to companies that were healthy enough to still be in the index this morning. The index swaps names out every year and over a decade that is a long list of companies that a current member list simply does not contain.

This hits mean reversion rules hardest. A rule that buys a drawdown and waits gets tested only on the drawdowns that recovered, because the names where the drawdown kept going are precisely the ones that left the index. The test never sees them, so the recovery rate it reports is not the recovery rate you would have lived through.

Its a bit like judging a high school program by asking the seniors how it went. The kids who quit in tenth grade arent in the room to ask.

____

Two things that actually help.

The first is a universe dated to the day the rule fired, so a name enters the test when it entered the index and leaves when it left. Point in time membership data is sold rather than given away, which is why so few retail tests have it.

The second is cheaper. Run the same rule on a fixed basket you chose for a reason that has nothing to do with current membership, a handful of names you picked by sector at the start date, and compare. If the current member version is much stronger, the gap between them is a rough measure of how much of the result was survivorship.

Worth saying that the length of the history is not what fixes this. The equity candles I test on in Agenticks go back to 2000, and a test built on a current name list carries exactly the same bias at 26 years as it does at 10. The bias comes out of the list of names, and it can only be removed there.