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Lessons From Our May Portfolio

In a post at the beginning of May, I presented a hedged portfolio designed to handle the headwinds of war, inflation, and recession. The hedged portfolios Portfolio Armor builds last six months, so that one wrapped up this past week. There are some interesting lessons we can draw from it about the role of leveraged ETFs. More on that below, but first, let’s look at what was in the portfolio and how it did.

Our May 2nd Portfolio

Here’s how we how we introduced the portfolio in our May post:

[A]s investors we will still face headwinds due to the war in Ukraine, and the sanctions in response to it: inflation, shortages, and impending recessions. That raises the question of where one might put money to work now in light of that gloom. Below is an answer. 

Let’s say you have $50,000 to invest now, but you don’t want to risk losing more than 20% in a worst case scenario. On Monday, our system might have presented this portfolio to you, which is essentially a hedged bet on natural gas and corn getting more expensive, and European and emerging market stocks getting cheaper over the next six months. 

Screen capture via Portfolio Armor on 5/2/2022.

How The Underlying Securities Did

Ignoring the hedges for a moment, here’s how the four underlying securities performed over the next six months:

• ProShares Ultra Bloomberg Natural Gas (BOIL): -61.24%
• Teucrium Corn Fund (CORN): -6.45%
• Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ): +54.94%
• ProShares UltraShort FTSE Europe (EPV): +14.39%

So we had two 2x leveraged ETFs (BOIL and EPV), and one 3x leveraged one (EDZ). If you had bought equal dollar amounts of them without hedging, you would have been up 0.41%. That would have been like picking up a penny in front of a steamroller–not worth it.

How The Hedged Portfolio Did

This portfolio finished up double digits, +10.13% (net of hedging and trading costs) while the market-tracking SPDR S&P 500 Trust ETF (SPY) was down over the same time frame, -8.79%.

You can find an interactive version of the chart above here.

What Have We Learned?

A few things:

• Inverse ETFs give you a shot at generating positive returns during a bear market. 
• You can get crushed holding leveraged ETFs without hedging them: BOIL was down more than 61% unhedged over 6 months.
• You can do well holding even 3x leveraged ETFs over 6 months. EDZ was up nearly 55% over the time frame of the portfolio.
• If you hedge, you can eliminate most of the downside risk of holding leveraged ETFs or other volatile securities. Although BOIL was down ~61% unhedged, the hedged BOIL position in this portfolio was only down ~16%.
• In a concentrated portfolio, one big winner goes a long way. Most of the gains in this portfolio came from our 3x leveraged bet against emerging markets (EDZ).

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