Personal Finance

How to destroy SPY using leverage and top global consumer brands



While both, risk parity and individual ownership of businesses can be viable techniques to building wealth, why not use a combination of the two given the evidence? We all realize how difficult it is to beat SPY on a consistent basis, as even the GOAT himself, Warren Buffett, has gone on record countless times to endorse ETF’s such as SPY vs. individual stock picking.

Here is a simple allocation that includes 4 securities:

**50.0% SSO**

**25.0% AGG**

**12.5% KO**

**12.5% MCD**

The math behind this allocation works out to a total of 150% leverage:

* 125% equity exposure and 25% fixed income exposure

[Here](https://imgur.com/a/gDNLYXP) are the results dating back to the inception of SSO:

Out of 13 years of data (including the unfinished calendar year of 2019), the allocation beat SPY in 12 of the 13. The single year of underperformance was 2018 with a drawdown of -5.65% vs. SPY drawdown of -4.52%. The allocation outperformed SPY during the financial crisis years, as well as during opposite heated bull market years like 2013. An overall CAGR of 11.21% vs. 7.96% for that of SPY. Further, a higher sharpe for the leveraged allocation, and a similar max drawdown to that of SPY. Take a look at [the data](https://imgur.com/a/IZAfXfT) yourself.

And [here is the chart](https://imgur.com/a/eolmPZs) as a visual representation of the outperformance.

I chose KO and MCD as the individual securities, as these are among the [top global consumer brands](https://www.rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=334&year=1217) according to Forbes dating back multiple decades. One could likely replace these securities with PG, and/or PEP for example, but I prefer the former given the consistently high rankings as top tier global brands. The idea is to choose consumer brands that will act as bond substitutes during equity drawdowns, thus minimizing the allocation drawdown and creating a better sharpe over long periods of time, and to choose brands whose products/services will almost certainly be directly linked to inflation. Both KO and MCD offer these types of products and routinely act as some of the best securities to own during large equity drawdowns, for reasons that are probably more obvious than not.

Risk parity and owning strong consumer brands (tilted towards consumer staples) are both great forms of building wealth, but why not combine the two? While several money managers and hedge fund gurus will spend countless hours trying to beat SPY with limited annual success, a simple and proven method using leverage, strong brands and an annual rebalancing mechanism will likely destroy the pros with minimal effort.

*as a side-note, the daily re-setting of SSO is actually a tailwind vs. what most assume to be a headwind for the leveraged product. That is, during both 2008 and 2013, SSO actually outperformed what should have been a -74% drawdown and +64% gain given SPY’s total annual return each year. SSO certainly suffered a large drawdown in 2008, but it was less than 2x SPY, and it outperformed on the upside, greater than 2x SPY in 2013.*




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5 Comments

  • Why did you choose to test this strategy in our longest bull run in history? Testing during that period means this strategy has outperformed during a previous bull market, but how did it do 2006-2009? How did it do in 2005? 1999-2001? It underperformed in the first down year of your dataset, why would I expect it to outperform if anything gets bad again?

  • This is not what Buffett endorsed using ETFs for…

    Interesting model though. I see why it worked and with 50% in SSO it probably will over the long haul (although you’ll have some very rough patches in there).

    For me, I go for normal index funds and if I want leverage I’d probably dedicate some cash to buying longer term calls on a 3x bull fund

  • Wouldn’t it be much simpler to buy SPY on 50 percent margin? No rebalancing, no BS. Even easier with hindsight bias, is 150 percent QQQ.

    Captain Obvious will say these are all bull market strategy’s. If Ursa Major comes along, down goes the ship. Those stocks listed held up well in the back test. Forward results are unlikely to be as favorable.

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