knowledge base

Jan 04 2022

Creating Leveraged Investment Portfolios

Leveraging Investment Portfolios

Summary

In this post, we’ll model a 1x leveraged investment portfolio of JNK – SPDR Blmbg Barclays High Yield Bond ETF. Next, we’ll model using a 50 / 200 moving average of JNK to add and remove the leverage.

Said in simple terms, we’ll leverage the portfolio when the 50 day is over the 200 day average. When the 50 day drops below the 200, we’ll de-lever and just hold JNK.

All modeling is done with FT Cloud and FTCloud’s static model. Watch a quick overview of the Static Model here. Sign up for a free trial here:

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What is Leverage

Leveraging a portfolio is when an investor borrows money to purchase securities. If the securities purchased with borrowed money appreciate, you enhance your profits without using your own capital. If the purchased securities produce a loss, you repay the debt at par and magnify the loss on investment.

Fire In Your Living Room

Leverage can greatly magnify gains and losses. Certain investors live and die by leverage, but it’s not something to employ lightly. I recently had a user describe it to me like this: “It’s like building a fire in the middle of your living room. While that fire will heat your house and keep you warm, if you don’t keep on top of it will burn the place down.”

Modeling Leverage

We’ll jump right into FT Cloud. We’ll use the Static Model to accomplish our goals.

First, navigate to the (1) Data >> Static Model tab. Then look in the (2) lower middle of the screen for the leverage details. The leverage info gives you the % leverage, margin rate, and % cash in the portfolio.

To create a leveraged model, allocate weighting to the portfolio that adds to more than 100%. The above picture shows an example portfolio with a 250% allocation.

Relating this to a $100,000 portfolio, the above example would have the following positions:

SPY – $150,000
TLT – $100,000
Total – $250,000

Margin Rate

The margin rate is the cost of borrowing funds. This is expressed in an annual percentage rate. The interest compounds each time the portfolio rebalanced. A monthly rebalance has monthly compounding interest and a weekly model has weekly compounding interest.

Set the global margin rate on the Login>>Advanced Options screen.

Leverage is the total leverage on the portfolio. In the above 250% leverage example, $100,000 is the original capital position, and the $150,000 is the leveraged position. $150,000 / $250,000 = 150% leverage.

The cash position is the balance in cash for any models that have under 100% allocations. A model with a single SPY position of 80% will show a cash position of 20%.

Calculate the Portfolio

Once we have our details dialed in, we need to crunch the portfolio. In FT Cloud, we’ll create an FNU by clicking the “Create FNU” button.

This saves an FNU file to your local disk and adds a new ticker to your FT Cloud database. The value in the “ticker” field is used as the portfolio’s new ticker. Use this ticker anywhere in FT Cloud.

Checking the Work

Open Log will open the windows folder where all leveraged model logs are stored. The leverage log is a .CSV file that has the following columns:

Date – Market date of values
Non Levered Portfolio – value of the underlying non-levered static model. In the above 250% example, this would be the values of a 60% SPY, 40% TLT portfolio. To calculate the model FT Cloud creates a non levered static model with the following weightings: $150k / $250k = 60% SPY and $100k / $250k = 40% TLT portfolio. Once this 60/40 portfolio is calculated, then FT Cloud applies 150% leverage to the 60/40 portfolio.
Running Total Non Levered Portfolio – The daily value of the un-levered portion of the portfolio. This is a “show your work” value. It acts oddly by jumping in value at the beginning of every month. This is due to the resetting of the un-levered value to the previous day’s [Levered Portfolio Value] (plus the day’s price change)
Original Borrowed Amount – the amount borrowed at the beginning of the investment period. This value resets every time the portfolio is rebalanced. This value change does not change throughout the period. ie. you borrow a fixed dollar amount on the first day of the month, then repay that same fixed dollar amount at the end of the period.
Borrowed Amount Value – the daily value of the borrowed funds. On the first day, the original borrowed amount is invested with the same allocations as the nonlevered portfolio. Each day the [Borrowed Amount Value] changes according to the change of the [Non Levered Portfolio]
Period Cost – the fractional portion of the annual interest charged over the investment period. This also remains unchanged during the period. Since we borrow a fixed value on day 1, the interest is charged off that fixed value. This is calculated as:
( [margin rate] / [rebalance frequency] ) * [Original Borrowed Amount]
Daily Cost – the period cost divided by the number of market days in the investment period. For the same reasons, this value does not change during the investment period.
Net Return on Borrowed Amount – This is the result of the following equation:
[Borrowed Amount Value] – [Original Borrowed Amount] – [Daily Cost]
Levered Portfolio Value – This is the result of the following equation:
( [Previous Day Running Total Non Levered Portfolio] * [Daily return of Non Levered Portfolio] ) + [ Net Return on Borrowed Amount]

Click the link below for a google sheet log of the above leverage model. Columns A-I shows the regular log values. Columns K-Q show the work of how the values are derived.

https://docs.google.com/spreadsheets/d/1WSRegP95Hz_BbEaSQj1-psvlRfmmH0nxusy5zA1IeOE/edit?usp=sharing

Apr 24 2018

What’s in the FastTrack Stocks Database?

We’ve posted in the past about the decreasing number of investible stocks in the US (https://investorsfasttrack.com/is-passive-active/). Per the post, there’s about 3,000 investible companies listed in the US. But, FastTrack has approximately 4,500 stocks in the database. What makes up the difference?

First, FastTrack tries to include every stock listed on the NYSE and NASDAQ exchanges (including NYSE Arca and NYSE American). Those exchanges both have their own price, market cap, and volume requirements for listing/maintaining a listing. We update new listings/ discontinued issues as they IPO and/or approximately every month.

Adding all NASDAQ and NYSE tickers brings us to approximately 4000 tickers. Next, we take any liquid, large and mega cap over the counter ticker and add those in. Those names are typically international companies such as Tencent Holding, Royal Dutch Shell, Nestle SA, HSBC Holdings, Toyota Motor, etc. Typically there are 300-400 such tickers, rounding the database out to ~4,500.

There are thousands more OTC tickers out there, but the data quality and investability of those assets are low, so we can’t include them in the database.

Now, with all those tickers at hand, it’s very useful to sort and sift those securities with the the FT Cloud or FastTrack family sieve. In the screenshots below we’ll use the FT Cloud family sieve to analyze all liquid large securities.

Sign in to FT Cloud, click the “Spreadsheet/Chart” tab, then click the “Load Family” in the upper right corner.
Expand the Stocks >> Avg Volume Trees on the left of the new window
Select each of “Volume-Over 5 Mil” then click “Add” in the upper right
Select each of “Volume-1-5 Mil” then click “Add”
Select each of “Volume-500k-1Mil” then click “Add”
Click “Load” at the bottom right

Now, you should see the ~1,800 liquid securities on the spreadsheet

Mar 26 2018

Smart Beta and High Yield

We’re highlighting smart beta and actively managed ETFs again this week. While still a small portion of the overall market (see the attached article), increased market volatility and rising interest rates are bringing investor interest back to active.

For now, mostly in bond products, but re: the attached article, international and emerging market products are picking up, with $239 billion in fund flows last year vs $692 billion flowing into passively managed funds

Here’s how you would use FT Cloud to investigate the investment prospects of the active high yield funds highlighted in the article.

Load spreadsheet and click “Load Family” in upper right.
Expand the tree to “Funds & ETFs” >> “Fixed Income” >> High Yield. Double click high yield to load all high yield tickers into the grid on the right.
Next, expand “Funds & ETFs”>> “Company”>> “ETF.” Then single click “All-ETF” and the press the “And” button on the upper right. This remove any tickers that are not in both the “High Yield” and “All ETF” family. This will leave us with only the High Yield ETFs.
Next click load and start analyzing the ETFs in the spreadsheet. Rank by risk, return, correlation, and performance compared to the benchmark. See last weeks article on how to choose a benchmark (https://goo.gl/fCQgHd)

https://www.cnbc.com/2018/03/19/seeking-downside-protection-investors-check-actively-managed-etfs.html

Mar 19 2018

How to Choose an Benchmark – Market Indexes

We get lots of questions about indexes, specifically what are the appropriate indexes to use on the spreadsheet benchmark field. The short answer is… for US Equities use an US equity benchmark (SP-DA – S&P 500 div adjusted) and bonds use a bond benchmark (AGG-X – Barclays Aggregate Bond Ix) .

But, if you’re doing a more specific analysis, use a more specific index. For example:

High Yield: MLHY- Merrill Lynch US HY Master II H0A0 Index
Financial Equities: IYF-X ETFINDEX Financial Index
Preferreds: PFF-X ETFINDEX S&P US Preferred Stock Ix
Semiconductors: SCY-X ETFINDEX Semiconductor Index
BioTech – DJ-BT Indexfam DJ US Biotechnology Index
Global STocks – DJW-X Indexfam DJ Global Index
China – DJ-CB Indexfam DJ China Broad Market Index

FastTrack’s got an index family that lists all indexes in the database. Today we have over 400 and are adding more as they appear. Also, in FT Cloud you can click the “search” link at the top of every page to open the search window. There are you can ticker and key word search all indexes (as well as the rest of the database.)

While we’re on the topic of indexes, here’s an interesting article on the makeup of the popular AGG Aggregate bond index. Below is a great quote from the article. Like many traditional indexes, AGG is a market cap weighted index. While we all can understand this in equities (larger the value of combined equity the larger the weighting). For bonds though, it’s the larger the total outstanding debt, the larger the weighting. So… more debt (and sometimes leverage), the higher the weighting. Its not quite the same math.

“If you think about the construction of traditional indices, a market-cap weighting structure. It makes more sense in equities. On the bond side, it gets a lot harder. A market-cap weighting system where you give the highest weight to the most indebted issuers is not ideal,” ….

https://www.marketwatch.com/story/are-investors-getting-more-risk-with-passive-bond-funds-than-they-bargained-for-bis-asks-2018-03-14

Feb 27 2018

Data Quality – Screening Funds and ETFs

Here’s a great illustration of why you need dividend adjustments when analyzing funds and ETFs. QLENX (a lower risk AQR managed long short fund) has been popular with FastTrackers for a few years and it would be totally off your radar if you’re using Yahoo, CNBC, Fidelity, or any number of other free data outfits for charting and ranking.

Only FastTrack is adjusting for the 12/19/2017 dividends. Adjusting for dividends, a simple UPI ranking puts QLENX on top for the past three years. Without adjustments, QLENX’s risk/ return profile is misrepresented and pushed to #644 in the rank.

The black FastTrack chart illustrates the difference pretty clearly. The large dip towards the end of 2017 is the div payout of QLENX. The NAV drops, share price is reduced, but without accounting for the div payout you’ll get incorrect charting and ranking.

This is what FastTrack is known for. We’ve been providing this high quality, dividend adjusted data to professionals and individuals for over 27 years. Download a trial or give us a call.