Original link: https://www.physixfan.com/warningsuizhemeilianchujiaxi-gangganchengbenyijingbuzaidilian/
Since 2022, the Federal Reserve has been raising interest rates at a rate that the market has not expected. As of today (2022.9.27), the benchmark interest rate is already 3.00%-3.25%. Since I’ve written quite a few articles about adding leverage, I feel compelled to remind myself of the obvious: leverage is not cheap anymore.
If you use margin loans to increase leverage, the increase in leverage costs is obvious: a minimum margin rate of 1% could be achieved a year ago, and today it is as low as 3.58%. The cost of other leveraged methods is slightly hidden, but in fact, the cost of both leveraged ETFs and LEAP Calls has increased accordingly.
Taking UPRO (3x leveraged SP500 fund) as an example, its holding cost, in addition to the 0.91% fund management fee, only needs to consider volatility decay , but now it is different. In addition to these two costs, the borrowing cost must also be considered . Although the interest rate is not explicitly listed in the fund’s fees, considering its mode of operation, a fund with 3x leverage must borrow 200% of the money. For the sake of simplicity, it is assumed that such a huge fund company can borrow the lowest interest rate. According to LIBOR or Fed Fund Rate, then at the current interest rate of 3%, the interest cost (annualized) of UPRO is as high as 6%. That is to say, assuming that the SP500 index does not rise or fall every day and has zero volatility within a year, then holding UPRO for one year will get a negative 6% return. If you look at the daily rise and fall of UPRO to see the tracking error, you may not realize this, because the annualized -6% average is just an invisible small amount within one day. As the Fed continues to raise interest rates, borrowing costs will continue to rise. This is also the purpose of the Fed raising interest rates: to let the whole society de-leverage.
Disclaimer: This article is not for everyone to time the market, because even if the cost of borrowing becomes higher, if the SP500 itself is very cheap, then it may still be worthwhile to hold UPRO. This article is just a reminder that there may be holders of UPRO or other leveraged ETFs who are unaware of the fact that the cost of holding is higher. …
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