With this strategy in particular, I think it's dangerous to think of the long term market return as being same as the expected return (ER). This is a difficult concept and one a lot of people struggle with, but essentially equity returns should be reflective of risk-free rate (RFR) plus a risk premium (RP). Both of those variables are in flux, but ultimately, the following statements should be true:Short SPX box spreads are once again below 4% through at least December 2028. Given the market's (VT's) long term return of near 10%, and the fact that the "interest" you pay on the short box is deductible, using moderate (1.2x and lower?) amounts of leverage on a taxable account makes a lot of sense.
Bonds ER = RFR + RP
Equities are (broadly) riskier than bonds. Therefore,
Equities ER = RFR + RP (higher than bonds)
This should hold true even in high interest rate environments. Therefore, even if the borrow rate is 15%, equity expected return should still outpace it (ER >15%). That said, I would hypothesize that the higher the interest rate, the smaller that spread is (just a theory).
My point is, I would ignore the long-term return entirely as a measure against the current interest rates in determining "should we leverage" or how much ER we're gaining by leveraging.
Statistics: Posted by DMoogle — Tue Sep 10, 2024 10:03 am