In some recent work I have been attempting to better model how a leveraged ETF might have performed back in the 1950s and beyond. Most leveraged bond ETFs like TYD didn’t start until around 2009 as far as I am aware. Now obviously no matter what happened in the bast that isn’t indicative of what will happen in the future. However, I do find it helpful to use history as a teacher.
The first step was to mimic IEF. This is more difficult in my opinion than mimicking the S&P 500 since I wanted to use inputs that would go really far back into the future such as the 10 year treasury yield. Unfortunately, this fund is made up of a blend of 7-10 year treasuries. Regardless we can see that simply by taking the 10 year treasury yield and doing the proper bond calculations we can get a curve that is very close to the actual performance of IEF with dividends reinvested. I used the dividend adjusted values from tradingview.com for my inputs.
TYD is essentially a daily 3X version of IEF. It was started later, but we can see that for this particular period we can get a pretty close match simply by assuming no fees except for assuming a drag equal to 1 times the federal funds rate at that time.
Fee = 1X Federal Funds Rate
Fee = 2X Federal Funds Rate
Fee = 3X Federal Funds Rate
Best Way to Mimick TYD
To the best of my ability to tell the best way to mimic TYD for backtesting purposes is to assume a drag/expense of about 1X the federal funds rate at the time. It is hard to say for sure if this is accurate, but over this period it certainly gives the closest match to actual TYD. I don’t know exactly how leveraged ETFs are able to keep the costs this low, but so far it seems that they are. Part of me wonders if it could be offsetting swaps with short ETFs. For the most part you are then just matching investors and charging a small fee. I will continue to investigate what they are doing internally, but as of now this is a positive sign to see these funds doing so well at managing costs. It is certainly possible that this method only works in the period I have to compare to and that in other periods it is a terrible model. Regardless, I think it is interesting.
Full History Synthetic TYD
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