This strategy is 2x leveraged and very risky. To dampen volatility, we suggest combining it with other strategies to a meta-portfolio. Our All-Stars Leveraged does that for you.
- Objective: 2x leveraged growth
- Type: mean-variance optimization
- Invests in: leveraged ETFs tracking stocks, treasuries, gold
- Rebalancing schedule: weekly with possible daily exit
- Taxation: 100% short-term capital gains
- Minimum account size: $5,000
TuringTrader’s Mach-2 provides 2x leveraged returns, outperforming the S&P 500 in most years while limiting the downside risk. The proprietary strategy switches between separate models for bull-market and bear-market regimes. Both models use mean-variance optimization to select their assets and assign weights. Mach-2 rebalances weekly and holds no more than three ETFs, resulting in low maintenance effort. However, when markets transition from a bull to a bear-market regime, the strategy may require exiting positions any day. In summary, Mach-2 appeals to investors seeking to bolster the returns of a meta-portfolio with only little effort.
The operation of Mach-2 can be summarized as follows:
- in bull-markets, trade ETFs tracking the S&P 500, Nasdaq-100, Dow-Jones Industrial Average, Russell 2000, S&P MidCap 400, and S&P SmallCap 600 indices
- in bear-markets, trade ETFs tracking U.S. Treasuries with 7-10 year and 20+ year maturity, and gold
- switch between bull- and bear-market regimes based on TuringTrader's Market Vane signal
- evaluate the performance of various asset weightings over a lookback period of approximately three months
- rebalance every week, picking the combination with the best modified Sharpe Ratio
Mach-2 is closely related to LogicalInvest's Universal Investment Strategy. We enhanced the strategy by adding more assets and switching between separate bull- and bear-market strategies.
Mach-2 fully invests in one or more broad indices tracking the U.S. stock market in bullish markets. During bear markets, the portfolio switches to the safety of U.S. treasuries and gold. With these properties, Mach-2 is well diversified in terms of company risk but relies on serial diversification to avoid steep losses.
Our simulation shows a beta of less than 0.75, which is 60% lower than the portfolio's 2x leverage and indicating successful tactical asset rotation. Nonetheless, investments in Mach-2 have a tail-risk equivalent to being 2x leveraged on the S&P 500.
Returns & Volatility
Mach-2 beats the S&P 500 benchmark in most years with only brief periods of underperformance. The mean-variance optimization helps to manage portfolio volatility, while the market-regime filter helps to avoid deep drawdowns.
As a result, Mach-2's portfolio volatility is 40% lower than the value expected based on the 2x leverage. Further, the portfolio's downside is about 70% lower than buying and holding a 2x leveraged S&P 500.
In summary, Mach-2 delivers most of the desirable upside of geared ETFs while successfully limiting risks to levels bearable for retail investors.
Account & Tax Considerations
Mach-2 is a very aggressive strategy. Investors should not take leverage lightly and consider the tail risk when seeking high returns. In our opinion, Mach-2 is best used in the context of meta-portfolios, namely All-Stars Leveraged.
Mach-2 trades frequently and regularly triggers taxable events. The portfolio rarely holds assets long enough to qualify for long-term treatment of capital gains. However, because of the portfolio's massive upside over buy-and-hold, Mach-2 may still add value to taxable accounts.
Mach-2 makes use of 2x leveraged ETFs, which are considered high-risk instruments. Many brokerages require signing additional disclosures before allowing investors to use these instruments in their accounts. Because we use these products in tandem with our proven market-regime indicator, we believe our use of these instruments to be responsible. The ETFs used often trade at relatively thin volumes. Read our background article on market liquidity to learn why we believe this to be acceptable.
Mach-2 invests in no more than three ETFs at a time. The strategy should function as intended with as little as $5,000 of capital.
- v1, April 2021: Initial release, based on LI's Universal Investment Strategy.
- v2, April 2022: Reduced volatility in regimes of mostly negative returns.
- v2, May 2022: Replaced UGL with DGP.
- v3, October 2022: Implement exit to T-bills when mean-variance optimization fails.
This table shows the portfolio's key performance metrics over the course of the simulation:
The following chart shows the portfolio's historical performance and drawdowns, compared to their benchmark, throughout the simulation:
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This chart shows the portfolio's annual returns:
The following charts show the Monte-Carlo simulation of returns and drawdowns, the portfolios 12-months rolling returns, and how the portfolio is tracking to its benchmark:
The portfolio last required rebalancing after the exchanges closed on . Due to fluctuations in asset prices, the exact allocations vary daily, even when no rebalancing occurred. The current asset allocation is as follows: