Leveraged ETFs are a bad idea for low-Sharpe, high-vol single stocks. They work better for a diversified stock/Treasury/gold/trend mix. The leverage that empirically maximized compound returns in @the_green_lark's chart is similar to the theoretical Kelly leverage (Sharpe/volatility). I asked Grok to generate this table. It figured out the implications of Sharpe/vol and added the comment about continuous-time Kelly leverage. Would you run the four-asset mix at 5x (half-Kelly)?
Green Lark
@green_lark
Sep 5
Historical CAGR starting 1985 as a function of leverage. Single-stock leveraged ETFs generally aren't suitable for long-time holding, though there may be exceptions like BRKA, which is effectively an index and behaves similar under leverage as the market. Some leverage makes a lot of sense for ETFs diversifying into bonds, gold, trend.
4
1
51
7,238
Capital efficiency is vastly underrated, and this area is exactly where I am focused Much more very soon…
2
10
601
Charles McGarraugh
@CMcgarraugh
Sep 6
Capital Efficiency Matters If you care about long-term CAGR, you actually want volatility. Volatility means your money is working harder per unit of funding. I asked grok to compare simulated returns on two hypothetical investment strategies: 1) Sharpe Ratio = 1, volatility = 20% 2) Sharpe Ratio = 2.5, volatility = 5% Everyone thinks strategy 2 is better, and its certainly easier to hold and harder to build. But after 10 years you are between 80-90% likely to have made more money with strategy 1 than with strategy 2, depending on how correlated they are. (The more correlated their returns streams between 1 and 2, the lower the volatility of the diff, and therefore more likely you are to do better with 1) The challenge, of course, is risk managing the left tail, which is considerably easier to do with strategy (2). And TOO much volatility nearly guarantees permanent capital destruction, so you need a judicious approach. Too much leverage is a really terrible idea. Still, the point stands - for many investors it makes sense to make your money work harder by being willing to warehouse the fluctuations arising from a judicious application of dynamic leverage. This is one obvious path to better CAGR... *if* you can withstand the noise. Some nice charts from grok.
1
3
738
Replying to @CMcgarraugh
I like this post and mostly agree. I have noticed, though, that 2.5 Sharpe strategies use more leverage because they hedge out more uncompensated bets, and the increased leverage makes it harder to manage tail risks. Has your research found otherwise?

Sep 6, 2026 · 2:14 PM UTC

1
8
6,183
Sort replies: Relevant Recent Liked
Replying to @ReformedTrader
Yeah great question. Here's my opinion, but i could be wrong: I think generally speaking, to get to a 2.5 sharpe you either a) need a lot of leverage in different things or b) you need to be trading the same things very frequently. Either way you are trying to increase the bet count "N" in the fundamental equation of active trading, which is : P&L = N*X*E where: N = number of uncorrelated bets X = size of bet E = edge of bet Fast stuff generally doesn't scale well. But if you aren't going to go fast, but instead try to stack uncorrelated risk premia, that is going to eventually pull you toward things that are generally positive in the mode but with nasty tail effects. Things like vol carry, selling reinsurance, credit-risky lending, etc. Especially if you want scale at that type of 1.5+ Sharpe. Because of the need for higher absolute leverage to make a multi-strategy (if you'll excuse the phrase) approach like this work in scalable risk premia, you end up running a lower volatility, because if you went higher, the occassional jump risks become too unmanagable to underwrite. This may be why the multi-strat hedgefunds generally are pretty unvolatile... they are warehousing jump risk. But for an investor with a bit of risk tolerance/capacity, why not just settle for a noisier fluctuation at a lower Sharpe and benefit from a higher CAGR. You dont need a Sharpe of 2.5 to make money. You can just be happy warehousing the volatility knowing the higher geometric compounding return in the end is the thing that matters most over time, while warehousing less jump risk.
2
1
20
868
Yes - I think a realized Sharpe of 1.0 after costs and after hedging tails is very good and can achieve a high rate of compounding if one is willing to apply sufficient leverage. It does seem like both institutions and retail investors are scared to apply leverage to exactly this kind of strategy, though (e.g., QDSIX). At the level of leverage necessary for high compounding, the volatility is scary. So investors gravitate toward strategies that seem "safe" but contain hidden tail risks. I'm not sure what can or even should be done about this - it's possible this is one of the reasons these strategies remain profitable.
1
10
439
more replies