Trend-Trading SLYG Beats Leveraged ETFs

 |  About: SPDR S&P 600 Small Cap Growth ETF (SLYG)
by: Krystof Huang

My tests are only preliminary, but clearly suggest that it is probably better to trend-trade an energetic unleveraged ETF such as SLYG than a leveraged ETF.

This study was partly inspired by "The Small Cap Stock Index For You," by Ploutos, from February 2013, which suggests small cap investors should consider ETFs based on the S&P-600. Coincidentally, I also recently posted my results of 40-year trend-trading simulations in an article, "The Best & Less of Long-Short Investing." My results suggest that well-chosen trend-trading methods can be highly effective for decreasing downturns while possibly not decreasing long-term gains. However, these results also indicate that trend-traders should compensate for periodic weaknesses with the following measures.

  • Add some investments in the best long-short mutual funds if they keep up with the S&P during normal periods such as 2010.01-2012.12.
  • Use buy-and-hold on 1/5 to 1/3 of each trend-traded position.
  • Buy more aggressive ETFs.

So, I was interested in Ploutos' persuasive findings that the S&P-600 has been, and seems likely to remain, significantly advantaged. In addition to dodging downturns, an obvious advantage of trend-trading is in telling us when to dive in for the bursts in small-cap growth immediately after downturns. My initial lookups indicated substantially greater 2009-2012 trend-trading potential in the S&P-600 Growth Fund SLYG than in IWM for the Russell-2000 or SPY for the S&P-500. See the following gain records on 2013.02.27 according to

I include a few specialized ETFs that have done well recently, to indicate the general potential of aggressive unleveraged ETFs, for which well-planned trend-trading can be expected to reduce downside risk. I list closely related ETFs together, while attempting to represent the best returns for each index or strategy, with recently better-performing strategies at the top.

Please note that SLYG has done well for a general fund, not as likely as a sector-specific fund to have intermittent spurts, and having more of a known quantity for determining optimal trend-trading methods. However, there are other good choices. Also, 3-year and 5-year results tend to be similar because they straddle the 2008 slump. A lower 5-year result does not necessarily indicate a less energetic fund.

Meanwhile, I was also eager to test out whether perhaps trend-trading might consistently harvest the often tempting and sustained gains of a 3x leveraged non-inverse ETF. Relative to its long-term disadvantage, the results went surprisingly well for the 3x but not well enough.

Please note that there is no 3x small-cap ETF old enough for significant testing. A performance history was extrapolated by tweaking a 1x and 2x until each of their recent performances matched that of a 3x. Also, please do not consider these 5-year results to be advice. I would do 20-year testing before deciding what SMA to use. This is only a preliminary comparison of trend-trading leveraged ETFs vs. unleveraged ETFs, during a period which is favorable for trend-trading.

+3x Leveraged Small-Cap ETF: trend-trading gains after -0.5% per trade slippage leeway.
Method 2007.08- 2007.12 2008 2009 2010 2011 2012 2007.08 to 2012 Max Loss
Buy&Hold -16% -82% 45% 64% -31% 40% -65% -95%
SMA-115 -16% -22% 94% 28% -16% 16% 58% -37%
SMA-120 -16% -24% 76% 28% -12% 6% 33% -43%
+1x SLYG Unleveraged S&P-600 Growth ETF: trend-trading gains after -0.5% per trade slippage leeway.
Method 2007.08- 2007.12 2008 2009 2010 2011 2012 2007.08 to 2012 Max Loss
Buy&Hold -2% -41% 47% 30% 4% 14% 30% -60%
SMA-85 -5% -9% 44% 19% -4% -2% 41% -20%
SMA-90 -3% -9% 57% 19% -9% -7% 40% -27%
SMA-95 -3% -12% 57% 16% -8% -2% 40% -23%
Tweaked SMA -2% -10% 51% 7% -5% 10% 50% -28%
Click to enlarge


  1. It is remarkable that trend-trading was able to convert a long-term negative into a positive cumulative for the 3x. On average, this cumulative seems to be about 25% greater than for SLYG.
  2. However the Max-Loss for the leveraged ETF also seems about 25% greater. In addition, the adjacent returns with the 120-day SMA are much less than with the optimum result with the 115-day SMA. This means we cannot be confident which sort of result the future might produce. In comparison, note the consistently good results for 3 adjacent SMAs for SLYG. This is to be expected because SLYG has an advantage whether or not we use the best trend-trading method.
  3. As shown in the end-of-2007 results, during which there was little gain or loss for the market, the trend-trading of leveraged ETFs could have converted neutral returns into significantly negative returns. This never happens with reasonable trend-trading methods on unleveraged ETFs.
  4. Meanwhile, as shown in the -16% for 2011 and +16% for 2012, even hindsight-biased results for leveraged trend-trading may seem somewhat good for one year and significantly not-good for another year.
  5. I was unable to significantly improve 3x trend-trading results with tweaking algorithms. This was to be expected. Perhaps someone has better methods, and I am always finding new ideas. But as a rule, you can always squeeze more from a juicy orange (or unleveraged ETFs) but not necessarily from a dry orange (or the negative long-term returns of leveraged ETFs).
  6. Preliminary as these tests are, they surely suggest that a consistently worthwhile method of trend-trading in leveraged ETFs is unlikely to be obvious or for sale cheap, if it exists.
  7. If it is this unpromising to trend-trade against non-inverse leverage, think thrice before you follow ubiquitous assumptions about trend-trading inverse ETFs.
  8. Similarly, I do not know of any persuasive testing or theory to support the ubiquitous notion that leveraged ETFs are somehow less of a gambit for day trading than for long-term investing.

Day traders often say that leveraged ETFs are not appropriate for long-term investing but somehow appropriate for them. This notion also seems implied by the SEC statements used to justify the existence of leveraged ETFs.

Leveraged ETFs may help to enable certain day trading strategies which otherwise might be unfeasible. However, if the daily plusses and minuses do not add up to a long-term advantage, this means the odds are against picking a good day to trade. Day traders might do all right in the long run with leveraged ETFs, although not because the odds change for them, but on the contrary, only because long-term investors might do all right if they use trend-trading. If I were a day trader and found leveraged ETFs necessary, I would hasten to do 20-year and 40-year extrapolation studies for a 3x RUT and 3x S&P just as card-counters use millions of simulations to determine what to do on any single hand. Furthermore, however, card-counters also attempt to flock to promotional events when the casinos change the rules in their favor. Common sense and algebra both dictate that if possible, one should not use leveraged ETFs. Seek out strategies and instruments that are fundamentally advantaged.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.