MichaelD

Must-Know Info for Investing in Commercial REITS, If You Dare

How would you analyze the prospects of a well-diversified ETF like VNQ over a long time-horizon, say 7 years? Say one assumes that the REIT index returns to its long-term average yield over those seven years. Is this reasonable? Or does one need to factor in above-normal bankruptcies? If so, what would be a reasonable assumption? I am investing through a handful or ETFs rather than individual equities. Thanks.

Using ETFs to Beat the Market with Lower Risk

I am not sure how the original premise makes sense. Ignore for a moment that SSO rebalances leverage daily. If it didn't the investing 5,000 in SSO would create a position of 10,000 long SSO but a borrowing of 5,000 which offsets your additional 5,000 in fixed income. That would be equivalent to 10,000 long SPY except that you now have more fees. It would only produce more if you bought riskier fixed income.

As was noted, SSO doesn't track 2x SPY. There was a great article in Institutional Investor's ETF Seventh Anniversary publication. Basically, because leveraged funds adjust leverage every day, they do better in trending markets. So if SPY is on a sustained rise, SSO has to upward adjust leverage every day which amplifies returns. Similarly, if SSO is on a sustained fall SSO cuts leverage every day which dampens losses. SSO does worse, however, in range bound markets, because after a down day it lowers leverage, which hurts it when the markets rise the following day, for example.

So this approach doesn't really reduce short term risk in terms of daily volatility. It will lose you less money in a major crash because of the adjusting of leverage noted above.