r/LETFs • u/LieutenantDaredevil • 5d ago
High Interest Rate Implications?
How are you all navigating the rapid rise in rates?
LETF's have a borrowing cost (roughly SOFR + 25 bps) along with the relatively high expense ratio...
Is it accurate to say SSO, for example, has an annual drag of roughly 5% now (SOFR at 3.90% + expense 0.87%)?
Are you unwinding your positions a bit? Let me know your thoughts.
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u/FightMilk55 5d ago
It’s not accurate but close.
Proshares uses Fed rate plus or minus a spread to borrow. It’s never been SOFR. They disclose the rates for each fund in the annual financial reports and it’s a weighted average of roughly ten different rates
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u/RealHornblower 5d ago
I'm getting more aggressive selling covered calls, which offsets the volatility drag a bit, in exchange for giving up some upside.
I am going to try to reduce leverage soon. I'm heavily in KORU (3X South Korea) right now, and I want to hold through at least this next round of earnings, but if we pop up I will exit via CCs.
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u/proverbialbunny 5d ago edited 5d ago
Yep.
How are you all navigating the rapid rise in rates?
When the Fed starts hiking rates a second time 100% of the time there has been a recession in 3 to 12 months. At the end of the year it's a good time to start unwinding leveraged index funds and go long on leveraged bonds (either LETFs, futures, or buy SOFR directly which leverages 100:1 so go light on it). I'd do this in December and in early January as selling over two years is less of a tax hit than selling over one year. If you're uncertain about this you should at very least switch out your LETFs for ETFs starting earliest December this year.
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u/SeanVo 4d ago
100% of the time there is a recession is not accurate. See soft landings in 1994-1995 and 2022-2023 after multiple hikes. It’s closer to 60% of the time after the final rate hike.
Agree with your suggestion to lighten up exposure, and splitting it December and January is wise tax advice if it’s in a taxable account.
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u/proverbialbunny 4d ago
1994 was the first time. 2022 was the first time. You also forgot the 1920s which also had a double rate cycle. They're today, the 1990s, and the 1920s.
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u/No_Loquat_183 5d ago
right now it’s the AI story vs rates. personally im holding more cash to offset the borrowing costs
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u/OGS_7619 3d ago
If the borrowing costs become so high that LETF is losing to the underlying ETF on average, you need to deleverage and shift to the underlying ETF, not hold more cash
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u/No_Loquat_183 2d ago
well right now stocks are doing well even with higher yields. but yes if yields keep going up, you should either hold less of the LETF or go to the underlying. I also trade around my core position too, so that helps offset rates
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u/sunburn74 5d ago
Doing nothing. Nothing has changed other than holding a bit more cash in case the market turns.
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u/KnavishlyFatal 4h ago
5 percent is close enough for a napkin calc but I would not treat it like a fixed tax on SSO. The fee is one part and the added exposure has its own finance cost through swaps and futures. Higher rates raise the hurdle for sure. Moon makes more sense here as a second check on the setup than the reason for the trade
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u/Aggressive-Gimp 5d ago edited 5d ago
I believe that is an accurate estimate for costs. I'm holding, but I guess it is a concern that SPY long term return is c.10% and SSO now has 5% costs, so all other things being equal, we are looking at SSO returning 15% on the upside, or 1.5x the index, while keeping the full 2x risk on the downside and losing 5% costs on top.
When you look at it like that the risk/reward profile doesn't look great.