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3x ETF = 3x Gains? Evaluating the UPRO Stock Price History

I’ve found myself going down a bit of a rabbit hole lately with some of these leveraged ETFs and it’s really been taking up a lot of my time!  I thought, “Ok, Andy – just sit down and do the math yourself”, so that’s what I did – let’s take a look at the history of the UPRO stock price!

Like I mentioned, these leveraged ETFs are something that I have known about for a little while, but I never really understood them truthfully.  I have continuously heard people say that they’re not meant to be long-term investments but my simple (stupid) mind always thought, “If the stock market historically goes up, why would I not want 3x those returns?”

Well, the returns are 3x the DAILY returns rather than the annual, so you can get in trouble with major swings from day to day because a loss will always be a larger dollar swing than a gain will be. 

I recently wrote about three of these leveraged ETFs that I evaluated at a high-level recently but they only covered the history of the ETF.  I think it was a great entry into leveraged ETFs, though, and highly recommend that you check them out if you’re brand new into this topic.

The thing that I hated about the ETF history was that I felt like I just was missing out on the opportunity to actually be able to get the truth behind the story because the ETF history was just barely 10 years old.  While that’s great, that’s nothing compared to the actual data that I can gather on the S&P 500 from Yahoo Finance, so I just decided that I was going to take things into my own hands.

Rather than just taking the simple route and comparing the history of the actual ETF, I wanted to actually compare some more substantial data to uncover if these 3x ETFs were good investments or not.

To do so, I chose to compare UPRO vs. the S&P 500.  Personally, I think that the S&P 500 is the most representative index to benchmark your performance against, so I felt that it only made sense for me to compare a 3x S&P 500 ETF vs. the S&P 500.

Now, as I mentioned, since there is no actual ETF data that goes back to 1928, the main assumption that I made when doing this comparison is that I took the daily return for the S&P 500 and then multiplied it by 3.  After all, that is the goal of UPRO, so I am just making the assumption that they were able to perfectly match this 3x return.

So, it all comes down to this – if you had actually invested $1,000 into the S&P 500 on 1/3/1928, you would then have $201,866.55 – that’s a pretty nice return to turn $1,000 into over $200K!

But, if you had invested that same amount into UPRO, your total would be $269,164.24!  Might not seem like a massive amount more, but that’s an outperformance of about 35% solely based on the total amounts that you would have. 

Does that seem more than you were expecting?  Less?  Maybe you were thinking it would be higher since it’s a 3x ETF?  Well, this is why it’s really important to make sure you fully understand how the ETF functions. 

When you’re getting 3x the daily returns, you’re going to have some really high highs and some really low lows…

Take a look at the graph that I have charted below:

As you can see, there are some absolutely massive hikes and drops in there.  It’s hard to see a lot of the data pre-1980 because of the scale, but even just look in the 1900’s.  You can see that the S&P 500 is outperforming UPRO until about 1995 and then UPRO takes off like a freaking rocket!

It gets up near $250K and then almost immediately drops right back down below the S&P 500.  And this actually tends to be a bit of a somewhat repeatable process.  Not necessarily repeatable in the sense that it’s predictable, but repeatable in the way that we have seen it happen multiple times as you can see from that graph.

This is a stock that’s going to require you to have the strongest risk appetite to stick out these hard times.  Do you think you could do it?

For instance, the lowest total that you would’ve had by investing in the S&P 500 would’ve been a 75.23% decrease down to $247.75.  Ouch.

But, what do you think happened with UPRO?  It dropped by 99.91% down to $.91….

Lol.

I mean, honestly – what would you have done in that situation?  Personally, I’m like, “I’d buy a bunch more!”

But would I?  I would’ve just lost legit nearly all of my money while the amount in the S&P 500 investment was $420, meaning a loss of 58%.  Sure, sounds like my decision to be risky was a huge, huge, huge mistake, right?

Well, as we know, in the long-run it actually makes sense for me to stay invested in UPRO because I will end up with about 35% more as of November 2020, but man – that sure was a tough road.

If I had sold then I would’ve locked in my massive, massive losses.  But if I had added just $5 to my investment when UPRO was at it’s low, the $269K total that I had originally would’ve turned into over $1.7 MILLION!

Seems kinda hard to believe, right?  That’s why I like to do the math to understand on my own!

As with any of my analysis, I like to look at different timeframes to get a well-rounded perspective, so I decided to also look at data starting in 1950, 1975 and 2000.

Ready to have your mind blown?  Let’s see what $1K would’ve turned into:

Trust me – that UPRO number in 1950 is not a typo.  I went back and checked legit like 15 times to make sure everything was right.

My initial thought when I saw this data was, “holy crap, I can’t decipher anything from this.”

I sat on it for a few days and continued to think about what it really meant and the thing that I finally came away with was this – the volatility is just so incredibly insane that it’s going to make someone go crazy.

I mean, the numbers don’t lie – the potential to turn $1K into nearly $44 million is probably something you’ll never, ever find, but the potential also is there for you to turn $1K into a $191 profit after 20 years, meaning you massively underperformed the market.

So, the data is here, and I can see some pretty major upside but also some major downside as well…now, the question is, “am I going to invest?”

Let me try to walk you through exactly where my mind went for me to try to decipher if this was a sound investment or not:

  • Do I trust US business?  Do I trust the stock market?

This one might sound ridiculous, but at the end of the day, this is probably the most important.  The history of the stock market is one that has consistently always gone up.  Over time, as long as you are a long-term investor, you should’ve been able to make some massive returns.

If you think that the stock market is going to continue to go up, then that certainly is a great first step.  Over the course of time, we have had some pretty great annual returns with the S&P 500:

So, not only do you need to be confident that US business and the stock market are going to continue to grow, but you should really think about the returns that you might get.  Will they be more like the returns from 1975 – 2020 that saw a nearly 10% on just the average price return?  Or, will they be more like 2000 – 2020 where they were spot on 6%?

Of course, it’s impossible to predict, but it’s just something that you need to really think about prior to investing so you can get a general idea of your risk tolerance.  Speaking of…

  • What are you going to do when the ETF inevitably tanks?

There’s going to be a bear market.  There will be a recession.  Maybe even a depression!  What are you going to do when that happens?

Are you going to panic and sell out of your position?  Or, are you going to buy into the ETF as it continues to drop to give you a little more upside when things rebound?  But those two aren’t the only options!

Maybe you buy all the way down and then panic and sell.  Maybe you just hold it the whole way.  Maybe you sell as soon as you gain 5%. 

The key with these is that you need to really get a good idea of what you’re going to do when adversity hits.  As Mike Tyson has been quoted saying, “Everybody has a plan until they get punched in the mouth.”

We’re fortunate enough to have the ability to brainstorm what that “punch in the mouth” exactly might be.  Is it down 50%?  99%?  What does it take to break you?

It’s impossible to be 100% certain but you really need to think about what might get you to your breaking point way before investing.  This is a super volatile ETF so if you’re the type that is panicky and can’t handle the stress, just stop.  I think you’ve already thought about this too much and investing in this leveraged ETF is a sure-fire way to lose money.

If you think you can handle it, then keep moving on!

  • What is your goal?

What is your goal for this sort of investment?  Are you trying to hit it big and win the lottery or do you just want to outperform the market? 

I am a huge advocate for benchmarking yourself to an index to try to outperform it but this isn’t even in the same type of conversation because it’s inherently 3x as volatile as the market.

It’s like comparing quarterbacks of different eras against one another.  Passing wasn’t really much of a thing when the NFL first began and the league itself was just way different.  It was grittier – running the ball, playing hard defense, etc.  So, saying a QB now is better than one 30 years ago is impossible to backup with stats.

I mean, you could use stats, but you’re flawed from the get-go.  Ever wonder why all of the all-time career passing leaders have retired within like 5-10 year, or maybe are still playing?  It’s because the league is different now!

This is what I’m saying with your goal – it can’t be a normal goal because it’s not a normal investment.  You have to truly define what you want.  Do you want to hit a certain return?  Do you want to pull it out in a certain amount of time?  Or something else?

  • How much do you want to invest?

If you’ve made it this far, then you get to decide how much you want to invest.  Honestly, only you know what is best for this.  It comes down to your risk tolerance but I really wouldn’t be considering investing literally anything that you weren’t fine with losing literally 100% of.  Plain and simple.

So, what let me go through and answer these concisely for you so you can see my mindset:

  • Do I trust US business?  Do I trust the stock market?

Yes, absolutely.  This is why I invest in the first place.  If I didn’t trust it, I wouldn’t invest.  Returns these last two decades are down but still 5.4% more than I get in my high-yield savings account, and that doesn’t even include the dividends that I will get.

  • What are you going to do when the ETF inevitably tanks?

Hopefully, I will buy more.  That will be my goal.  Normally I am a huge fan of lump sum investing but, in this case, I am going to dollar cost average.  Simply because it’s so risky I don’t want to just throw all my money in at once.

Ideally, when it tanks, I will try to buy a little bit more but that’s naturally going to be hard to do, but that is my goal.

I will not sell, though.  I will not sell.

  • What is your goal?

My goal is to make as much as possible for retirement.  So, I do not have an amount that I want but rather a timeline.  I will plan to retire in 25-35 years so my goal is to make as much by then.  Until then, my goal is to continue to ratably add money into the ETF.

  • How much do you want to invest?

Not a lot.  This is super risky and very speculative so I am going to start with a very small position and then literally add $20/paycheck, or $10/week, to the ETF and just see where things go.  My plan would be to do this for a few years and just see how things shakeout. 

My goal is for this to be such a small amount but you saw how $1K can turn into $43 million.  Maybe I strike gold.  That’s the sort of mindset that I have going into this.

Personally, I think that I am a very rational investor and can handle the bumps and bruises along the way.  If you are not built this way, then don’t even consider investing in a 3x ETF like UPRO because you could be setup to fail from the start.

Maybe instead you should look at a high-dividend yield ETF like VYM – aka the epitome of compound interest!