So you like leveraged ETFs and you like Value. Can we combine them? Here I discuss the current options for a leveraged value ETF.
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Why a Leveraged Value ETF?
If you’ve landed on this page, hopefully leveraged ETFs require no explanation. If they do, go read this post first explaining how they work. Basically, we’re paying a fee to increase exposure (and risk) in the portfolio within a single fund. I listed some examples of popular leveraged ETFs in this post.
And in doing so with stocks, e.g. with something like UPRO, a 3x S&P 500 fund, we also know we almost certainly want to diversify across assets and hold some bonds too, such as in the case of the famous Hedgefundie strategy, and like I showed here for TQQQ. In short, holding leveraged bonds mitigates the portfolio’s volatility and risk when holding leveraged stocks.
But if you know anything about factor investing, we also know that we expect Value stocks to beat Growth stocks, and we get a convenient diversification benefit in overweighting them. That is, those independent equity risk factors tend to be uncorrelated to one another; they move at different times. As a result, I’d say it is reasonable to seek out a leveraged value ETF to further fortify your leveraged strategy. Others apparently feel the same, evidenced by the number of searches I get on this very website for such a product.
Unfortunately, at the time of writing, there is no leveraged value ETF. Period. However, several funds exist that may still fit the bill for a somewhat naive proxy.
IWDL – ETRACS 2x Leveraged US Value Factor TR ETN
IWDL is probably the closest thing we’ve got to a true leveraged value ETF. This fund launched in February, 2021. It seeks to provide 2x the quarterly performance of the Russell 1000 Value index and has an expense ratio of 0.95%.
Unfortunately, there are a couple immediate drawbacks with IWDL. First, you may have noticed that it’s not an ETF at all. It’s an ETN. Recall that ETNs carry their own unique risks compared to ETFs. Secondly, IWDL only has a terribly low $30 million in assets, meaning potential liquidity issues and risk of closure. Lastly, it’s only 2x leveraged, meaning you’d need a higher allocation of it alongside 3x funds.
UMDD – ProShares UltraPro MidCap400
UMDD from ProShares seeks to deliver 3x daily exposure to the S&P MidCap 400 Index. The fund launched in 2010 but still only has about $50 million in assets.
While this may sound like a simple leveraged mid cap fund, the earnings screen from the underlying S&P index conveniently provides positive loadings across the Value and Profitability factors. We also obviously get exposure to the Size factor by holding mid caps. One downside to consider is that the greater volatility of mid caps means volatility decay of the fund is going to hurt worse.
UMDD has an expense ratio of 0.95%.
UDOW – ProShares UltraPro Dow30
UDOW from ProShares seeks to deliver 3x the daily returns of the Dow Jones Industrial Average. This fund launched in 2010 and boasts nearly $1 billion in assets.
UDOW and UMDD have about the same Value exposure, but UDOW has greater loading on Profitability, as well as a slightly positive loading on the Investment factor.
An obvious downside of this fund is that at the end of the day, the Dow is just a price-weighted index of only 30 arbitrarily chosen large cap companies, which is pretty strange. As such, it does not provide well-diversified exposure to U.S. large caps.
UDOW has an expense ratio of 0.95%.
Conclusion – Where To Buy These Leveraged Value ETFs
These leveraged products should be available at any major broker. My choice is M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Be sure to read up on the potential pitfalls of using leverage before blindly buying in. Again, leveraged ETFs are better suited for experienced investors. Remember that using leverage – especially in the form of leveraged ETFs – increases portfolio risk and the potential for greater returns, but also the potential for greater losses. Do your own due diligence and read the fine print on these products.
Do you employ a value tilt in your leveraged strategy? Let me know in the comments.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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Same as I found after all my research. I think the Dow has so much potential but my god it’s such a weird way to index. On the other hand, it’s tracked the sp500 pretty closely after all these years so something about it is working…
Thomas Moret says
Thank you for this webpage! I’ve been looking for this exact value leveraged ETF but haven’t quite found one. I’m glad you’re more comprehensive than I. The closest I’ve chosen for my pursuit of a small cap value ETF is URTY, a broad small cap 3x, which has a lower expense ratio than TNA.
May I ask why you’ve recommended UMDD? I would think it has both value and growth mid-cap companies, but you wrote differently.
On a minor note, it also might be worthwhile to mention that I’d read elsewhere that midcaps, among the three sizes, seems to be the most “stable” and “consistent”, and some have written that its been disregarded in the past because of the usual tilting of solely large and small caps. A cursory backtest on BacktestVisualizer provides midcaps with having the highest sharpe ratio and sortino ratio among the three sizes. So I’d agree with you that its a size aspect that shouldn’t be disregarded.
Thanks as always for your site.
John Williamson says
I wouldn’t own a leveraged small or mid-cap fund due to the much greater volatility decay.
MIDU is a 3X option for leveraged mid cap ETF. Not a true value fund either. Liquidity might be an issue as it is thinly traded compared to something like UPRO or TQQQ. There are some small cap funds such as 2x UWM and 3x TNA. Thought those might be worth mentioning. You can build a more diversified leveraged portfolio using these. Not quite the value tilt but can at least get more exposure to more than just mega and large cap.
Russ Abbott says
P.S. If you run a chart of IWDL against SPUU (2X S&P500) it turns out that they track each other surprisingly well.
Are you sure that IWDL “seeks to provide 2x the quarterly performance of the Russell 1000 Value index” and not 2X the *daily* performance, which is what most other leveraged funds do?
John Williamson says
No they don’t.
It’s because if you take a broad index and compare it to another broad index they tend to move in very similar patterns the markets general pattern tends to carry everything else with it in a similar direction.
Russ Abbott says
I found this page while I was looking for a leveraged value ETF. I’m glad you did the research — and disappointed that you didn’t find anything better.