While there will be very few who can out-debate Scott on putting 15% of their portfolio into a 3x levered index fund and then just gritting your teeth but that does not necessarily mean Scott is right either.
The Forbes article offers some numbers about how the daily reset can work against the portfolio and also work for it but there is a crucial point of understanding with any levered funds which is not so much that the do or don’t track their targeted index over time but that sometimes they do indeed track their index but only sometimes. There are other times when they do not and there is no way to know what they will do in the future; by definition.
Forbes gave the impression that Financial Engines might be working on a way to deliver the strategy in a product for its clients but that for now there was no such vehicle. Given the unpredictability of levered funds it might make more sense for anyone actually considering this to study whether long term index calls might make more sense.
Using call options would require less capital for the same equity exposure depending on the strike price chosen. In addition to index options, ETF options would be another possibility for executing the strategy. Options are more along the lines of what Taleb has talked about in this context.
In the real world it is very difficult to imagine too many people going down this road but there are learning points related to how much exposure to risk assets a client (or do-it-yourselfer) actually needs or can tolerate.
Far too many people have the wrong asset allocation for the totality of their situation and extreme concepts like the floor leverage rule provide an opportunity to revisit what is best for clients or yourself.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.