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Investing and Personal Finance
HEDGEFUNDIE’s Excellent Adventure (UPRO/TMF) – A Summary
Last Updated: July 12, 2023 226 Comments – 14 min. read
Here we dive into the famous “Excellent Adventure” from Hedgefundie and how to implement it.
Interested in more Lazy Portfolios? See the full list here.
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In a hurry? Here are the highlights:
- Hedgefundie is was a member of the Bogleheads forum.
- Hedgefundie created a thread in February 2019 proposing a 3x leveraged ETF investing strategy based on risk parity using the S&P 500 index (UPRO) and long-term treasury bonds (TMF) held in a 40/60 allocation. The thread later expanded into a Part 2.
- Hedgefundie later updated the strategy's asset allocation in August 2019 to 55/45 UPRO/TMF.
- Extensive backtesting, discussion, and analysis within the thread by members of the Bogleheads forum supports the validity and potential market outperformance of the strategy.
- The proposed strategy calls for quarterly rebalancing.
- Several different protocols/variations of the strategy emerged in the Excellent Adventure thread, including monthly rebalancing, rebalancing bands, and volatility targeting with various lookback periods.
- Some users have added a dash of TQQQ (3x the NASDAQ 100 index) for a minor tech tilt, as Big Tech has had a stellar run recently.
- It is recommended to implement the strategy within a Roth IRA on M1 Finance , to avoid tax implications and to make regular rebalancing seamless and easy.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here .
Prefer video? Watch it here:
Who Is Hedgefundie?
Hedgefundie is was a member of the Bogleheads forum who created a now-famous thread on the forum proposing a 3x leveraged ETF strategy.
What Is the Hedgefundie Strategy?
The Hedgefundie strategy – the wild ride of which is known as “Hedgefundie's Excellent Adventure” – is based on a risk parity allocation of leveraged stocks (3x the S&P 500 index via UPRO) and leveraged long-term treasury bonds (3x the ICE U.S. Treasury 20+ Year Bond Index via TMF). Note that “HFEA” is the shorthand initialism for the name of the strategy, not the ticker for a fund.
Risk parity is a portfolio allocation strategy in which, consistent with Modern Portfolio Theory (MPT), risk is spread evenly among assets within the portfolio by looking at the volatility contributed by each asset, thereby attempting to optimize returns per unit of risk (Sharpe). I explained it more here . Parity between stocks and long treasuries is roughly achieved at 40/60.
The Hedgefundie strategy relies heavily on the negative correlation (or at least, uncorrelation ) between stocks and long-term treasury bonds, wherein the bonds provide a buffer during stock drawdowns. Long-term treasuries are chosen precisely because they are more volatile than shorter-duration bonds and because of their degree of negative correlation to stocks, in order to sufficiently counteract the downward movement of a 3x leveraged stocks position in a crash. I delved into these specific benefits of treasury bonds here . This concept is based on the simple historical principle of improving risk-adjusted return (Sharpe) over long periods by holding uncorrelated assets, such as a traditional 60/40 stocks/bonds portfolio, as opposed to 100% stocks. In a nutshell, this is a way to hold UPRO long term in a much more sensible way.
Consistent with the idea of Lifecycle Investing , this heavily-leveraged strategy is better suited for young investors with a long time horizon who can afford to be risky early in their investment horizon. Hedgefundie advocates for treating this strategy like a “lottery ticket” and not using it with a significant portion of your total portfolio value.
Critics and naysayers reflexively exclaim the oft-cited, overblown, platitudinous “Leveraged ETF's aren't meant to be held long-term because of volatility decay,” but, in short, that doesn't concern me . Moreover, that same volatility decay can actually help when upward movement with positive momentum is occurring. I would also argue that as long as you can stomach the volatility, a major drop should [eventually] be followed by a major rebound; 3x hurts on the way down but helps on the way up. UPRO from ProShares and TMF from Direxion were chosen due to their low tracking error and high volume; again, we're getting 300% exposure to the S&P 500 and long-term treasury bonds, respectively.
The proposed strategy calls for quarterly rebalancing. Several different protocols/variations of the strategy emerged as the Excellent Adventure thread progressed, including monthly rebalancing, rebalancing using bands, and volatility targeting with various lookback periods. I'd keep it simple and avoid checking it often; I can see it being very easy to get emotional with this strategy and abandon your plan. It is recommended to implement the strategy within a Roth IRA on M1 Finance , to avoid tax implications and to make regular rebalancing seamless and easy.
I know this sounds saIes pitchy, but if you're wanting to use this strategy in a taxable account, I would argue it makes even more sense to use M1 Finance because if you're choosing to put in new deposits, the system will automatically rebalance the portfolio for you by directing new deposits to buy the underweight asset, thereby allowing you to avoid capital gains taxes that would otherwise be incurred with a manual rebalance. This is more impactful than it might sound at first. These are 3x leveraged ETFs; they can very quickly get out of balance. For example, let's say you start out at the prescribed 55/45 and stocks take off and bonds suffer, which causes it to stray to 75/25 after only a month. Not good. At this point you'd have to incur short term capital gains taxes (ouch!) just to get things back in balance. Granted, at a certain point, your new deposits may not be sufficiently large enough to provide the full rebalancing effect on their own, but that would be a great problem to have.
Utilizing a traditional, unleveraged 40/60 stocks/bonds portfolio, compared to an all-equities portfolio, has relatively low volatility and should produce higher risk-adjusted return (Sharpe) over long time periods, but would also likely underperform an all-equities portfolio in terms of total return. The solution, Hedgefundie maintains, is applying leverage. We're attempting to accept a risk profile similar to that of the S&P 500, but with much higher expected returns.
Hedgefundie updated the approach 6 months after posting the original strategy, opting to move to a 55/45 UPRO/TMF allocation from the previous 40/60 risk parity allocation. Hedgefundie's reasons are laid out here , based primarily on the premise that the stocks portion of the strategy is the primary driver of the strategy's returns and that the main purpose of holding the treasury bonds is essentially as “insurance” in case of a stock market crash.
Intrinsically, we're relying on US stocks and long-term treasuries not crashing in tandem. At the time of writing, these assets have a seemingly reliably negative correlation close to -0.5 on average. A key fundamental assumption of this strategy that Hedgefundie proposes is that the US will not return to pre-Volcker (pre-1982) monetary policy. That is, we'll be able to significantly mitigate or altogether avoid runaway inflation periods like the late 1970's, during which time bonds suffered greatly.
Stocks and long-term treasury bonds do not have a perfect -1 correlation. Sometimes they move in the same direction. This is actually a good thing. Historically, when these assets moved in the same direction, it was usually up . On days when stocks dropped, long-term treasuries fairly reliably rose significantly to mitigate the total loss.
Simulated returns going back to 1987 look like this:
Here are the rolling returns:
Below are the drawdowns. Notice the smaller drawdowns in most cases compared to the S&P 500:
I agree with Hedgefundie's assertion that extremely volatile assets like gold, commodities, small caps, etc. would suffer worse from volatility decay and would not improve the strategy's diversification and return. International developed markets may be a viable option to include, but Boglehead member siamond found issues with the DZK ETF , which ended up closing in October, 2020 anyway.
If you wanted to for some reason, you could also use the slightly more expensive SPXL instead of UPRO. Their liquidity and performance should be nearly identical.
Make no mistake that this is a risky strategy by its very nature. Read up on leverage and the nature of leveraged ETF's before employing this strategy. Do not put your entire portfolio in this strategy.
Read more details and nuances of the strategy on the original thread here . If you've got the time, there's a lot of learning to be had throughout the entire thread. The thread has expanded into a Part 2 here .
UPRO vs. TQQQ
Some users have added a dash of TQQQ (3x the NASDAQ 100 index) for a minor tech tilt, as Big Tech has had a stellar run recently. Others still are using TQQQ as the entire equities position for the HFEA strategy. I personally think this is unnecessary and is purely performance chasing as a product of recency bias .
Imagine for a second that this is January, 2010. After the previous decade, the S&P 500 is down by about 10% for that time period versus the Nasdaq 100 being down about 50%. Would you still be as enthused about TQQQ? Logically, we should be more willing to buy when prices are low, but I’d be willing to bet the honest answer to this question for most folks would be “no.” A rational investor should want to avoid expensive stocks and buy cheap stocks, but this unfortunately isn’t how investors’ highly-emotional brains work.
TQQQ has beaten UPRO historically in terms of sheer performance. But don’t succumb to recency bias. Past performance does not indicate future performance. More importantly, large cap growth stocks are now looking extremely expensive relative to history and are at the valuations we saw in 2000 at the height of the tech bubble, meaning they now have lower future expected returns. To make things worse, fundamentals of these companies do not explain these valuations. The current situation is simply the result of an expansion of price multiples.
Value stocks , on the other hands, are looking extremely cheap, meaning they now have greater expected returns. Of course, we expect Value to outperform every day when we wake up anyway due to what we think is a risk factor premium . If you buy TQQQ, you won’t own any Value stocks. TQQQ is purely large cap growth stocks, the segment with lower expected returns. You also won’t own any small- or mid-cap stocks, which have outperformed large stocks historically.
The valuation spread between Value and Growth was recently as large as it’s ever been. Historically, wide value spreads have also reliably preceded massive outperformance by Value. At the end of the day, we’re still paying for a discounted sum of all future cash flows; Growth cannot get more expensive forever. Unfortunately, there's no leveraged Value ETF .
People like to claim “tech is the future!” That may be true, but that doesn’t have much to do with stock market returns, which are not correlated with GDP. The economy is not the stock market, and the stock market is not the economy. Remember that extremely high expectations for these tech firms are already priced in , and they will have to exceed those expectations in order to beat the market. Moreover, good companies tend to make bad stocks and bad companies tend to make good stocks.
Also remember that you don’t need a “tech tilt” anyway; the market is already over 30% tech at this point. The NASDAQ 100 is basically a tech index at this point; it's realistically about 70% tech, posing a sector concentration risk, which is uncompensated risk.
While I don't employ or condone market timing, we also must acknowledge the fact that we may see rising interest rates sometime in the near future, and TQQQ inherently has more interest rate risk than UPRO. Moreover, TQQQ by definition excludes Financials, which tend to do well when interest rates rise.
Now may be the worst time to overweight large cap growth, but my time machine is broken. Only time will tell which index outperforms. We can’t know the future, but I would argue that’s the reason for broad diversification in the first place.
Why Not 100% UPRO?
If we're expecting UPRO to be the driver of the strategy's returns, why not go 100% UPRO? Hedgefundie addressed this in the original Bogleheads thread by pointing out that in doing so, we'd probably expect super deep drawdowns from which it may take decades to recover. Here's a backtest showing 40/60 UPRO/TMF (Portfolio 1) vs. 100% UPRO (Portfolio 2) to illustrate:
Here's UPRO vs. the S&P 500 going back to 1955:
My Hedgefundie Adventure Performance
Tracking the quarterly change in performance (relative to the initial value; no new deposits) of my Hedgefundie Adventure in my own portfolio starting October 1, 2019:
01/01/2020: +7% 04/01/2020: -2% 07/01/2020: +35% 10/01/2020: +54% 01/01/2021: +79% 04/01/2021: +67% 07/01/2021: +105% 10/01/2021: +105% 01/01/2022: +150% 04/01/2022: +98% 07/01/2022: +14% 10/01/2022: -14% 01/01/2023: -10% 04/01/2023: +5% 07/01/2023: +11%
Alternative Options To the Hedgefundie Portfolio
If you want to utilize a leveraged strategy similar to that proposed by Hedgefundie but be completely hands off, PIMCO has been doing something similar for years with their StocksPLUS Long Duration Fund ( PSLDX ) since 2007. I reviewed the fund here . Note that you can only access this fund through certain brokers, and it may have a minimum investment requirement and transaction fees. Those details are beyond the scope of this post; ask your broker if it's available to you.
Similarly, if you're doing this with a small portion of your portfolio or if you want to employ a leveraged strategy in a taxable account, WisdomTree's NTSX may be a suitable option, effectively providing 1.5x leverage on a traditional 60/40 stocks/bonds portfolio. It holds 90% straight S&P 500 stocks and 10% treasury futures to achieve effective notional exposure of 90/60 stocks/bonds. I reviewed the fund here .
Bogleheads user MotoTrojan proposed a variant by which you can match the volatility of Hedgefundie's 55/45 UPRO/TMF, tone down the leverage a bit, and save some on the expense ratio of TMF by utilizing Vanguard's Extended Duration Treasury ETF (EDV) in a ratio of 43/57 UPRO/EDV. Here's an M1 pie for that . This variant would also be more tax-efficient than the original strategy that uses TMF if you're doing this in taxable.
Rapidly rising interest rates and/or runaway inflation are the primary risks for this strategy. If those concerns are material to you and make you hesitant about this strategy, or if you simply want more diversification across asset types, then a leveraged All Weather Portfolio may appeal to you. There are also some diversifiers listed below.
Addressing Concerns Over Long-Term Treasury Bonds
I've gotten a lot of questions about – and a lot of the discussion in the original Bogleheads thread has been about – the use, utility, and viability of long-term treasury bonds as a significant chunk of this strategy. I'll briefly address and hopefully quell these concerns below.
Again, by diversifying across uncorrelated assets, we mean holding different assets that will perform well at different times. For example, when stocks zig, bonds tend to zag. Those 2 assets are uncorrelated . Holding both provides a smoother ride, reducing portfolio volatility (variability of return) and risk.
Common comments nowadays about bonds include:
- “Bonds are useless at low yields!”
- “Bonds are for old people!”
- “Long bonds are too volatile and too susceptible to interest rate risk!”
- “Corporate bonds pay more!”
- “Interest rates can only go up from here! Bonds will be toast!”
- “Bonds return less than stocks!”
So why long term treasuries?
- It is fundamentally incorrect to say that bonds must necessarily lose money in a rising rate environment. Bonds only suffer from rising interest rates when those rates are rising faster than expected . Bonds handle low and slow rate increases just fine; look at the period of rising interest rates between 1940 and about 1975, where bonds kept rolling at their par and paid that sweet, steady coupon. Rates also rose steadily from 2016 to mid-2019, during which time TMF delivered a positive return.
- From 1992-2000, interest rates rose by about 3% and long treasury bonds returned about 9% annualized for the period.
- From 2003-2007, interest rates rose by about 4% and long treasury bonds returned about 5% annualized for the period.
- From 2015-2019, interest rates rose by about 2% and long treasury bonds returned about 5% annualized for the period.
- New bonds bought by a bond index fund in a rising rate environment will be bought at the higher rate, while old ones at the previous lower rate are sold off. You're not stuck with the same yield for your entire investing horizon.
- We know that treasury bonds are an objectively superior diversifier alongside stocks compared to corporate bonds. This is also why I don't use the popular total bond market fund BND. It has been noted that this greater degree of uncorrelation between treasury bonds and stocks is conveniently amplified during periods of market turmoil, which researchers referred to as crisis alpha .
- Again, remember we need and want the greater volatility of long-term bonds so that they can more effectively counteract the downward movement of stocks, which are riskier and more volatile than bonds. We're using them to reduce the portfolio's volatility and risk. More volatile assets make better diversifiers. Most of the portfolio's risk is still being contributed by stocks. Let's use a simplistic risk parity example to illustrate. Risk parity for UPRO and TMF is about 40/60. If we want to slide down the duration scale, we must necessarily decrease UPRO's allocation, as we only have 100% of space to work with. Risk parity for UPRO and TYD (or EDV) is about 25/75. Parity for UPRO and TLT is about 20/80. etc. Simply keeping the same 55/45 allocation (for HFEA, at least) and swapping out TMF for a shorter duration bond fund doesn't really solve anything for us. This is why I've said that while it's not perfect, TMF seems to be the “least bad” option we have, as we can't lever intermediates (TYD) past 3x without the use of futures.
- This one's probably the most important. We're not talking about bonds held in isolation, which would probably be a bad investment right now. We're talking about them in the context of a diversified portfolio alongside stocks, for which they are still the usual flight-to-safety asset during stock downturns. Specifically, for this strategy, the purpose of the bonds side is purely as an insurance parachute in the event of a stock crash. Though they provided a major boost to this strategy's returns over the last 40 years while interest rates were dropping, we're not really expecting any real returns from the bonds side going forward, and we're intrinsically assuming that the stocks side is the primary driver of the strategy's returns. Even if rising rates mean bonds are a comparatively worse diversifier (for stocks) in terms of future expected returns during that period does not mean they are not still the best diversifier to use.
- Similarly, short-term decreases in bond prices do not mean the bonds are not still doing their job of buffering stock downturns.
- Historically, when treasury bonds moved in the same direction as stocks, it was usually up .
- Interest rates are likely to stay low for a while. Also, there’s no reason to expect interest rates to rise just because they are low. People have been claiming “rates can only go up” for the past 20 years or so and they haven't. They have gradually declined for the last 700 years without reversion to the mean. Negative rates aren't out of the question, and we're seeing them used in some foreign countries.
- Bond convexity means their asymmetric risk/return profile favors the upside .
- Again, I acknowledge that post-Volcker monetary policy, resulting in falling interest rates, has driven the particularly stellar returns of the raging bond bull market since 1982, but I also think the Fed and U.S. monetary policy are fundamentally different since the Volcker era, likely allowing us to altogether avoid runaway inflation environments like the late 1970’s going forward. Bond prices already have expected inflation baked in.
David Swensen summed it up nicely in his book Unconventional Success :
“The purity of noncallable, long-term, default-free treasury bonds provides the most powerful diversification to investor portfolios.”
Ok, bonds rant over. If you still feel some dissonance, the next section may offer some solutions.
Reducing Volatility and Drawdowns and Hedging Against Inflation and Rising Rates
It's unlikely that any of the following will improve the total return of the portfolio, and whether or not they'll improve risk-adjusted return is up for debate, but those concerned about inflation, rising rates, volatility, drawdowns, etc., and/or TMF's future ability to adequately serve as an insurance parachute, may want to diversify a bit with some of the following options:
- LTPZ – long term TIPS – inflation-linked bonds.
- FAS – 3x financials – banks tend to do well when interest rates rise.
- EDC – 3x emerging markets – diversify outside the U.S.
- UTSL – 3x utilities – lowest correlation to the market of any sector; tend to fare well during recessions and crashes.
- YINN – 3x China – lowly correlated to the U.S.
- UGL – 2x gold – usually lowly correlated to both stocks and bonds, but a long-term expected real return of zero; no 3x gold funds available.
- DRN – 3x REITs – arguable diversification benefit from “real assets.”
- EDV – U.S. Treasury STRIPS.
- TYD – 3x intermediate treasuries – less interest rate risk.
- UDOW – 3x the Dow – greater loading on Value and Profitability factors than UPRO.
- TNA – 3x Russell 2000 – small caps for the Size factor .
- TAIL – OTM put options ladder to hedge tail risk . Mostly intermediate treasury bonds and TIPS.
- PFIX – OTC payer swaptions on interest rate changes; effectively shorting long bonds.
The Hedgefundie Portfolio ETF Pie for M1 Finance (UPRO/TMF)
Again, most users are utilizing M1 Finance to deploy the Hedgefundie strategy due to its dynamic rebalancing with new deposits, zero transaction fees, and its simple, 1-click rebalance that you can do quarterly. It takes no more than 30 seconds every 3 months. I wrote a comprehensive review of M1 Finance here .
The risk parity 40/60 portfolio would be this pie which looks like this:
To add this pie to your portfolio on M1 Finance, just click this link and then click “Save to my account.”
The updated 55/45 portfolio would be this pie which looks like this:
Canadians can find the above ETFs on Questrade or Interactive Brokers . Investors outside North America can use eToro or possibly Interactive Brokers .
M1 Finance currently has an account transfer promotion to earn up to $15,000 as outlined below:
M1 also currently has a promotion for up to $500 when initially funding an investment account:
Disclosures: I am long PSLDX, NTSX, UPRO, and TMF in my own portfolio .
Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com .
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About John Williamson, APMA®
Analytical data nerd, investing enthusiast, fintech consultant, Boglehead, and Oxford comma advocate. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit .
December 2, 2023 at 4:37 pm
Hi John, What are your thoughts on the TMF reverse split that recently occurred? What would be the next steps for those in this strategy prior to the RS? Does it change the approach of HFEA strategy?
December 5, 2023 at 5:58 pm
Hey Mike, doesn’t change anything. Splits are a neutral event.
June 21, 2023 at 6:07 pm
Hi John – can you elaborate more around the potential tax implications of Hedgefundie and why you suggest having it in a Roth? Thanks!
June 22, 2023 at 5:33 am
LETFs are relatively tax-inefficient vehicles and then the likely-necessary rebalancing would incur capital gains taxes every time it’s done.
June 12, 2023 at 2:01 pm
Hey John, any update? I imagine things are looking much better now, even with TMF still being down. I started DCAing into this strategy in 2021 with some TQQQ weight thrown in and I’ve already regained all of the 2022 loss despite TMF still being down, which feels like it is at a long term bottom anyway.
June 14, 2023 at 1:53 am
Just added April 1, 2023. Up 5% as of that date.
June 15, 2023 at 2:55 pm
Sorry, didn’t realize you were doing quarterly updates. Considering how volatile the last couple of years were and having an Achilles heel of high inflation actually happen, I’d say that it’s holding up well compared to just straight S&P. Interested to see where it goes from here.
June 16, 2023 at 3:50 pm
Indeed. Fingers crossed.
April 19, 2023 at 4:59 pm
How did you get the portfolio analysis to back test further then the start date of the fund/etf? I don’t see that option in the. analyzer and therefore do not see the same results. Thanks.
April 19, 2023 at 7:14 pm
Need to either create your own simulation data or for a rough approximation use the underlying 1x funds and set leverage %.
March 2, 2023 at 9:28 am
What’s the latest on this strategy? I know it got massacred during the last year, but does it still show promise long term?
March 3, 2023 at 4:03 pm
No one knows. The viability of an inherently long term strategy doesn’t change based on its recent performance, either bad or good.
February 21, 2023 at 11:04 am
Question on M1, can I set my HFEA account there up for quarterly rebalancing? My understanding of the rebalancing with HFEA is I need to sell every share and re-buy at the proper allocations. Doesn’t M1 just sell the percentage you need moved to rebalance and then buy the same percentage on the other side of the ledger? In other words, if I’m at 57/43 in a traditional 60/40 portfolio, wouldn’t M1 sell 3% of bonds and buy 3% stocks? My understanding is that the HFEA rebalancing won’t work with that and I’ll need to sell all UPRO/TMF and buy it back to avoid time decay. Is that wrong?
February 21, 2023 at 11:15 am
Rebalancing is simply selling the overweight asset(s) to buy the underweight asset(s). This is 1 click with M1. Not sure where you got the idea that you need to sell everything.
January 9, 2023 at 11:49 am
With all the impact on HFEA strategy, I wonder if 2x SSO/UBT/UBS makes better sense now? Also, NTSX’s can be seemingly balanced out with DBMF fund. Here is what I came up with after back-testing in Portfolio Visualizer for various tax-sheltered DIY retirement accounts to move from NTSX/SPGP/IWY 40/40/20:
NTSX/NTSI DBMF/KMLM 35/35 15/15 SPGP/RWJ/PDBC 75/15/10 SSO/UBT/UST 75/15/10
Any feedback would be much appreciated.
January 1, 2023 at 2:07 pm
Can you please share how you simulated the returns for UPRO prior to 2009 (when UPRO was formed). Thanks.
January 2, 2023 at 1:31 pm
Download historical returns of S&P 500, 3x daily and subtract fees.
November 18, 2022 at 12:57 am
Any thought on why both UPRO and TMF and moving down in tandem.?
November 21, 2022 at 8:04 pm
High inflation, rising interest rates, less demand for long bonds.
September 14, 2022 at 1:56 pm
I’m hanging in there with this strategy. Hard to time the market, of course, but I should have known that buying bonds in the fall of 2021 with rates at historic lows wasn’t the best idea…UPRO and TMF have been moving down together since January 2022. Ouch. Hindsight is 20/20.
Good for us all to remember that losses aren’t realized unless you’re selling at a loss. If you’re 10+ years from needing/wanting this money, relax, don’t panic, stay the course.
With that, I’m wondering if you might be willing to update your great charts and graphs in your post to give us all a better sense of where the strategy is now as compared to other strategies?
Thanks a million for the great info!
September 15, 2022 at 11:36 am
Good idea, Tyler. I should update some things. Thanks!
August 31, 2022 at 8:52 am
Is this a disasterous strategy for taxable? I can’t put more money into tax-advanatged as this point, but would like to top up more. in taxable? Is this a bad move?
August 31, 2022 at 8:32 pm
Definitely not ideal in taxable. NTSX is a very tax efficient watered down version of it.
August 17, 2022 at 2:14 am
Did you ever find a way to add additional diversification with international exposure?
60% / 55% UPRO any real difference? Why not just go for 60% UPRO for 3x 60/40?
August 4, 2022 at 9:10 am
I’m curious to hear your thoughts on the following allocation that has been popping up on Reddit. The premise is that the 55/45 strategy worked great in the bull market over the past 30 yrs, but since yields can’t really go down too much further now, the author is proposing a 75/25 strategy with DAILY rebalancing instead.
August 4, 2022 at 12:37 pm
I personally probably wouldn’t go less than 30% TMF. Daily rebalancing would be too cumbersome for me unless it was automated somehow. But I’d stick with quarterly rebalancing anyway. Note that the author there was not proposing daily rebalancing but simply used that for modeling.
July 26, 2022 at 2:16 am
Hi John, I’ve learned so much over the past 2 years thanks to your site. The wealth of information and ideas for a beginning investor such as myself is priceless and I can’t thank you enough for the work you’ve done and continue to do!
Quick question – in your portfoliovisualizer backtest, you used the 40/60 pie. What are results for the 55/45? I’m not quite sure how to simulate as far back as you did.
July 19, 2022 at 4:16 pm
How does Mototrojan’s version returns compare to that of the 55/45 HFEA? I’m looking to employ one of the two into a taxable account, would Mototrojan’s version end up being better in a taxable account? I’m looking for absolute returns so should I still go with HFEA or do you think Mototrojan’s tax efficiency will be better?
This would be my extremely aggressive portfolio account so it is whatever money that I’m willing to lose all on. I love your articles have read a majority of them, thank you for having such great information so readily available!
July 26, 2022 at 9:41 am
Less leverage. MT’s should be slightly more tax efficient, yes. Thanks, Justin!
July 7, 2022 at 5:08 pm
They’re new, but have you looked at RPAR and UPAR? Levered up TIPS/Commodities/VT/Gold. UPAR is a juiced RPAR. Only 2 years of data on RPAR and only 7 months of UPAR. UPAR has been trading at a premium to NAV. I don’t like market timing bets, but with commodities getting crush, bonds crush, equities crushed, should be interesting to see how this year stress tests those two funds.
No COI. I don’t own either.
July 7, 2022 at 10:37 pm
Yep, I discussed them here . Interesting one-fund solutions indeed for a more “all weather” approach.
June 10, 2022 at 7:08 pm
Excellent article, thanks for breaking it down. Seems a good time to start DCA-ing into that strategy.
May 21, 2022 at 9:53 am
I worry that in an inflationary 1970s type environment, in which both stocks and long term bonds get slowly killed, this portfolio will get annihilated. The backtesting needs to include an inflationary regime, or else in my view this is criminally misleading / risky.
May 21, 2022 at 9:55 am
I know you call out the key assumption about not going into a pre-Volcker era, but I think that is an assumption that no long-term investor could responsibly make. I really think this blog post should come with a huge warning sign, and perhaps the inflation disclaimer should be in bold red ink ^.^
May 21, 2022 at 9:56 pm
Indeed it would. It’s what we’re currently seeing. The backtest does include that period. I noted several times one should assess their own beliefs about future inflation. This was discussed at length in the original Bogleheads thread.
May 9, 2022 at 6:10 pm
So what are folks using doing these days using HedgeFundie’s leveraged idea? I’m seeing some folks have as much as 25% of their portfolio in this concept? What’s the word on the street – are folks hanging in there on the UPRO/TMF combo?
You’d need strong stomachs – the idea was that TMF would provide some downside protection but it is DOWN -55% YTD – while UPRO is also down about 38%.
Instead of using the S&P500 leveraged 3x as with UPRO – what about a bit more tamer/moderate leverage approach using SSO (S&P500 2x leverage ETF) – and combined with EDV?
May 10, 2022 at 10:15 am
As we’d expect, some are sticking with it and others are realizing they don’t have the risk tolerance for such a strategy and are deleveraging or bailing altogether. This was always the achilles heel of the strategy.
May 3, 2022 at 1:20 pm
The drawdown has been rough over the last 6 months. I’m holding this portfolio in my Roth for the long-term, It looks like I moved into it at a bad time (July 2021).
May 1, 2022 at 1:14 pm
Hello John, I have learnt a lot about investing from your website, deeply appreciate you sharing your knowledge and breaking down complex topic, to a level understandable to most of us. Can you share if your HEFA investment is in taxable or tax advantage account?
May 1, 2022 at 10:48 pm
April 13, 2022 at 9:53 pm
I saw elsewhere a 2x leveraged version that is more tax efficient (similar backtested returns to PSLDX): 50% NTSX 30% UPRO 20% TMF
It seems great in theory. In addition, when I’m ready to exit, I would only have to sell UPRO and TMF and can keep NTSX as a core position.
April 14, 2022 at 12:30 pm
This would end up being more expensive and no more tax efficient than just using equal parts UPRO/VOO and equal parts TMF/TLT. It’s also 135/90 exposure, so not quite the same thing as just 2x. Don’t overthink it.
September 5, 2022 at 10:13 pm
John, what do you think on below allocation? Goal would be to lower volatility in high inflation times but still capture most of the advantages of HFEA. Quarterly rebalancing.
Normal times 60%UPRO, 35%TMF, 5%GLD
Inflation above 4.5% 60%UPRO/20%TMF/5% GLD / 15% UGL
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What is the bogleheads guide to investing.
What is the Bogleheads Guide to Investing?
Welcome to The Bogleheads Guide to Investing. In this Blog we’ll cover the top 10 investing principles of Bogleheads. T hese principles are based on patience, discipline, and the power of compounding interest. They are designed to help investors achieve their financial goals over the long term.
Before you jump into buying stocks and bonds, invest time into your PLAN upfront. Now, let’s break down each of these principles including how I’ve applied them to my investing success.
The AssetRise community is built upon the Bogleheads investment fundamentals below. AssetRise Portfolio Management is designed specifically to manage, track, and optimize Vanguard Boglehead portfolios.
Bogleheads Investing Principles
A workable plan is a comprehensive financial plan that is tailored to your financial goals and risk tolerance. It should include a budget, an emergency fund, and a retirement plan. The plan should be reviewed and updated regularly to ensure that it remains relevant.
Each Boglehead develops a unique plan called an IPS. An Investment policy statement (IPS) is a statement that defines your general investment goals and objectives. It describes the strategies that you will use to meet these objectives, and contains specific information on subjects such as asset allocation , risk tolerance, and liquidity requirements.
The first step in investing as a Boglehead is to write down your IPS then stick to it. This will be critical as you navidate the highs and lows of investing.
Here is an IPS example for you to use
Too many investors fail since they have no plan. They simply jump into buying the latest stock or chase past performance. Nobody can predict the future, so build you plan and stick to it.
Invest Early and Often
Once you have a regular savings pattern, you can begin accumulating financial wealth. How much saving is enough? For retirement, 20% of income may be a good starting point, but this will vary widely from person to person. If you want to be retire before age 65, or plan to leave significant assets to charity or to children, you probably need to save even more. Starting a regular savings plan early in life is important because investment returns compound over a longer period.
The image below demonstrates the benefit of starting early.
The best way to save money is to arrange automatic deductions from your paycheck. Many 401(k)s offer this. When you invest in an IRA or taxable account, choose a provider that will automatically deduct money from your bank account the day after pay day. This is described as “paying yourself first,” and it goes a long way towards establishing and reinforcing reasonable spending habits.
There are guidelines for which accounts you should fund and in what order. But always remember, you first need to save the money. When you start, saving regularly is more important than your choice of investments.
Your risk tolerance is your ability to stick to an investment plan through difficult financial and market conditions. To know if an asset allocation matches your risk tolerance, ask yourself if you held it, would you sell during the next bear market? This is very hard to answer honestly before you have experienced one.
In Bogleheads investing philosophy, it’s important to invest in a way that is appropriate for your financial situation and goals . This means that you should never bear too much or too little risk. Investing too conservatively can result in lower returns, while investing too aggressively can lead to higher risk and potential losses.
To determine the appropriate level of risk for your investments, you should consider your financial goals, time horizon, and risk tolerance. If you’re investing for a long-term goal, such as retirement, you may be able to tolerate more risk than if you’re investing for a short-term goal, such as a down payment on a house. It’s important to find a balance between risk and reward that is appropriate for your individual situation.
To give you enough money for retirement, you want assets with a decent expected return. This means you need to own stocks . Stocks return a share of the profits generated by publicly owned companies. But although they offer a chance of good returns, stocks are volatile and risky. In 2008, some markets fell 50% from their previous highs. Over time, stock prices roughly follow the trend of the economy, which is to grow. But prices can stagnate or decline for decade-long periods. This is why your asset allocation needs to include bonds as well as stocks. Boglehead philosophy is to buy stocks in a well diversified, low cost Index Fund.
The most popular stock fund is the Vanduard VTI ETF: Vanguard Total Stock Market Index Fund ETF consisting of over 3,000 U.S. stocks.
Bonds are a promise to pay back a loan of money on a set schedule. Bonds do not have the expected returns of stocks, but they are much less volatile. A mix of stocks and bonds will produce reasonable growth while limiting the size of the inevitable drops. How much in bonds? This is the basic question of asset allocation. Before you decide, you first need to balance your ability, willingness, and need to take risk . The more risk you can handle, the less bonds you need. When you are young, your prime earning years lie ahead, and it will be decades before you need to access the money. So, higher stock allocations may be suitable, because big drops in stock prices will not hurt as long as you do not sell during the drop.
John Bogle wrote: 
[A]s we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for income, and (4) perhaps an increased nervousness as markets jump around. All four of these factors suggest more bonds as we age. — Common Sense on Mutual Funds , John Bogle
Although your exact asset allocation should depend on your goals for the money, there are a few general guidelines that you can follow. These are based on practice rather than on theory, and are only a starting point for decision making, not the end.
For example, Benjamin Graham wrote: 
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequence inverse range of 75% to 25% in bonds. There is an implication here that the standard division should be an equal one, or 50-50, between the two major investment mediums. — Quoted in The Intelligent Investor , Jason Zweig
Alternatively, John Bogle recommends “ roughly your age in bonds “. For instance, if you are 45, 45% of your portfolio should be in high-quality bonds. He describes the idea as just “ a crude starting point ” which “ [c]learly … must be adjusted to reflect an investor’s objectives, risk tolerance, and overall financial position “. He also suggests that you should treat any national or state retirement income you might receive as if it is a bond, setting its assumed value appropriately.
This “ age in bonds ” and its variants, age minus ten years or age minus twenty years, are only approximate starting points. You will probably want to adjust them to fit your circumstances. For example, if you have a guaranteed state or other pension, this changes both your need and your willingness to take risk. Some investors do not add pensions and Social Security to their asset allocation of bond holdings.
It is easy to underestimate risk and to overestimate your tolerance for risk. In 2008, many people learned too late that they should have been holding more bonds. Think carefully before choosing an asset allocation with high stock market allocations. If you have not been through a major market downturn before, your abstract logical thoughts about risk can quickly become emotional ones. The developing field of neuroeconomics explains how mental traits and emotional effects that work well in other areas undermine our ability to deal rationally with markets and investing.
You should generally own bond funds instead of individual bonds , for convenience and diversification. Using individual corporate or municipal bonds require a very large holding in order to achieve the broad diversification and increased safety of a bond fund. The high number of different bonds in bond funds lets you ignore the risk of any one bond defaulting. You can manage Interest rate risk by choosing funds with short and intermediate-term duration , and default risk by choosing funds with high credit ratings. The idea here is for your bond holdings to reduce violent up and down swings in overall portfolio value. You want your risks on the equity side, not the bond side.
The most popular Bogleheads bond fund is the ETF BND: Vanguard Total Bond Market for its low cost and diversification.
Never Try to Time the Market
According to the Bogleheads investing philosophy, it’s important to avoid trying to time the market. This means that investors should not attempt to predict the market’s ups and downs and make investment decisions based on those predictions. Instead, investors should focus on creating a well-diversified portfolio that is appropriate for their financial situation and goals.
The Bogleheads believe that trying to time the market is a losing proposition because it’s impossible to predict the future direction of the market with any degree of accuracy. Instead, investors should focus on the long-term and remain disciplined in their approach. By investing regularly and staying the course, investors can achieve their financial goals over the long term.
Check out this article: Vanguard S&P 500 ETF VOO outperforms actively managed funds 11 consecutive years.
Use Index Funds When Possible
According to the Bogleheads investing philosophy, it’s recommended to use index funds when possible. Why use Indx Funds vs. Individual Stocks? Index funds are low-cost and provide broad market exposure. They are designed to track the performance of a specific market index, such as the S&P 500, and are passively managed. This means that they have lower fees than actively managed funds, which can help to keep investment costs low.
The Bogleheads believe that using index funds is a simple and effective way to build a diversified portfolio that is appropriate for your financial situation and goals. By investing in index funds, you can gain exposure to a wide range of stocks or bonds with minimal effort. This can help to reduce risk and increase returns over the long term.
The 5 most common Index Funds used by Bogleheads are:
- VTI: Vanguard Total Stock Market Index Fund ETF
- VXUS: Vanguard Total International Stock Index Fund ETF
- BND: Vanguard Total Bond Market Index Fund ETF
- VNQ: Vanguard Real Estate Index Fund ETF
- VOO: Vanguard 500 Index Fund ETF
Learn more about how to structure your portfolio by using an Investment Portfolio Asset Allocation strateg y.
Keep Costs Low
According to the Bogleheads investing philosophy, it’s important to keep costs low when investing . This means that investors should avoid high-fee funds and unnecessary trading. By minimizing investment costs, investors can keep more of their returns and achieve their financial goals over the long term.
The Bogleheads believe that using low-cost index funds is an effective way to keep investment costs low . Index funds are passively managed and have lower fees than actively managed funds. This can help to reduce investment costs and increase returns over the long term.
According to the Bogleheads investing philosophy, diversification is a crucial component of a successful investment strategy. The Bogleheads recommend spreading your investments across different asset classes to reduce risk. This means investing in a variety of stocks, bonds, and other securities.
The Bogleheads believe that diversification can help to reduce risk and increase returns over the long term. By investing in a variety of asset classes, you can reduce the impact of any one investment on your overall portfolio. This can help to minimize the impact of market volatility and reduce the risk of significant losses.
According to the Bogleheads investing philosophy, minimizing taxes is an important aspect of a successful investment strategy. Here are some ways to minimize investment-related taxes:
- Maximize contributions to tax-sheltered accounts: Contributing to tax-sheltered accounts such as 401(k)s, IRAs, and HSAs can help to reduce your taxable income and lower your tax bill.
- Invest tax-efficiently within taxable accounts: By investing in tax-efficient funds and holding them for the long term, you can minimize the amount of taxes you owe on your investments.
- Pay attention to “asset location”: By placing tax-inefficient assets such as bonds in tax-sheltered accounts and tax-efficient assets such as stocks in taxable accounts, you can further reduce your tax bill.
- “Back Door Roth”: Use Traditional IRA to fund the Roth IRA one time per account annually.
Invest with Simplicity
The Bogleheads believe that keeping your investment strategy simple and easy to understand can help you stay disciplined and avoid making impulsive decisions based on short-term market movements.
One way to invest with simplicity is to create a three-fund portfolio that includes a total stock market index fund such as VTI, a total international stock index fund such as VXUS, and a total bond market fund such as BND. This approach is designed to provide broad market exposure while keeping investment costs low.
By investing with simplicity, you can avoid the complexity and confusion that can come with more complicated investment strategies. This can help you stay focused on your long-term financial goals and achieve success over the long term.
For seasoned investors this level of simplicity will seem counterintuitive. However the data shows that a simple portfolio of low cost ETF Indes will outperform a stock pickers portfolio over the long term.
And…Stay the Course!
Look, investing is a very empotional game as you are playing with your hard earned savings. Bogleheads believe that its critical that investors should stick to their investment plan and avoid making impulsive decisions based on short-term market movements.
The Bogleheads believe that staying the course is important because it helps investors avoid the temptation to buy and sell based on emotions rather than logic. By remaining disciplined and focused on their long-term financial goals, investors can achieve success over the long term.
Wrapping it Up
I’ve been a Boglehead investor for over 10 years, by following these principles I have grown significant wealth over time. I’m very fortunate to have discovered the Boglehead investing principles at a young age after trying 2 failed investment advisors.
While you don’t need to put 100% of your investments into a Bogleheads portfolio, I hope you consider adding your “core” investments into it. You will be thankful over time.
AssetRise provides Boglehead, Vanguard, and FIRE investors portfolio allocation and rebalance tools to simplify investing and increase returns. AssetRise provides an industry leading portfolio rebalance calculator to increase investor returns.
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How the Largest Bond Funds Did In 2023
Dodge & Cox Income, PGIM Total Return lead, while Vanguard Short-Term Bond lags.
After two years of losses, investors in the largest bond funds have reason to cheer.
Across the board, the most widely owned bond funds posted gains for 2023, avoiding what just a few months ago looked like an unprecedented third consecutive year in the red.
With the Federal Reserve’s “higher for longer” messaging on interest rates, intermediate and long-term bond funds particularly suffered. That includes the largest funds in the intermediate core bond category, which is widely used as a foundational building block for investor portfolios.
However, with Fed officials revealing that they expect to cut rates in 2024 , bond funds rebounded 6.6% in the fourth quarter. According to Morningstar Direct, core bond funds have not posted a quarterly return that high since the late 1980s.
For example, the largest U.S. passive bond fund, the $302.3 billion Vanguard Total Bond Market Index fund VTBSX , gained 6.7% in the fourth quarter and 5.7% over the year. That compares to a 5.6% gain for the average intermediate core bond fund.
The largest active bond fund, the $131.6 billion Pimco Income PIMIX , gained 5.9% in the fourth quarter and 9.3% over the year—its best performance since 2012 and well above the 8.1% return on the average multisector bond fund. Morningstar director of manager research Eric Jacobson says that for much of the year, the fund benefited from income generated by its exposure to ultra-short-term rates.
Here’s a look at how the largest mutual and exchange-traded funds fared in 2023. Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside of retirement plans. The individual investor versions of those funds may carry higher fees, which reduces returns to shareholders.
2023 Performance: Largest U.S. Bond Index Funds
Among the largest passive funds, those focused on corporate bonds, such as the $44.8 billion Vanguard Intermediate-Term Corporate Bond ETF VCIT , posted the highest returns.
Investors came into 2023 with expectations of a recession, which would put companies at risk of defaulting on their debt. Instead, the U.S. economy gained strength throughout the year, and corporate bonds saw fewer credit rating downgrades and defaults than anticipated .
Long-term bond funds saw the lowest returns in 2023. The $51.4 billion iShares 20+ Year Treasury Bond ETF TLT gained only 3% on the year, despite surging 13% in the fourth quarter.
Largest Passive Bond Funds 2023 Performance
2023 Performance: Largest Active U.S. Bond Funds
Among active funds, multisector bond funds such as Pimco Income performed best in 2023. Among other categories, the $67.1 billion Dodge & Cox Income DOXIX posted a 7.8% return, outperforming over 90% of its peers in the intermediate core-plus bond category. The average fund in the category returned 6.2% in 2023.
“The strategy’s long-standing shorter-than-benchmark duration makes it less sensitive than its competitors to changes in interest rates,” says senior analyst Sam Kulahan . “This structural stance helps it hold up better than its benchmark and most peers when rates spike.”
The $80.2 billion American Funds Bond Fund of America RBFGX lagged its peers in the intermediate core bond category with a 5.1% return on the year. According to director of manager research Alec Lucas , “Most of the underperformance came in the second quarter due to a combination of the portfolio’s greater sensitivity to rising interest rates and yield-curve positioning.”
Largest Active Bond Funds 2023 Performance
Long-Term Performance Trends
Three-year performance for bond funds is largely negative, thanks to large losses suffered in 2022 as the Fed aggressively hiked interest rates.
Out of the largest bond funds, only two show positive three-year performances. The Vanguard Short-Term Inflation-Protected Securities Index VTSPX led the pack with a 2.3% annualized gain, benefitting from the outperformance of funds focused on shorter maturities. The average inflation-protected bond fund has lost 0.8% per year over the last three years.
According to associate manager research analyst Mo’ath Almahasneh , “Targeting short-term TIPS strengthens the fund’s sensitivity to inflation because short-term interest rates are more correlated with inflation than long-term rates. Additionally, the inflation protection embedded in the fund’s performance isn’t overshadowed by interest-rate risk.”
Pimco Income also holds a positive three-year return, posting a gain of 1.1% on an annualized basis, compared to an average return across the multisector category of 0.1% per year.
Five-year performance for bond funds is slightly better, with most posting returns between 1% and 2%. Again, the Vanguard Short-Term Inflation-Protected Securities Index and Pimco Income led with 3.3% and 3.4% returns, respectively. The only fund to post negative five-year returns is the iShares 20+ Year Treasury Bond ETF.
Largest Bond Funds Long-Term Performance
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies .
The Early Read on 2023′s Fund Flows Winners and Losers A look at some of the funds with the biggest inflows and outflows last year. Russel Kinnel
What’s in Store for Vanguard’s Funds, ETFs, and More in 2024 Morningstar’s take on what to expect from the industry giant this year, the manager change at Vanguard Dividend Growth, and performance in 2023. Daniel Sotiroff
Should You Still Have Bonds in Your Portfolio?
It’s easy to wonder if how we invest in bonds should change after the past few years. And if you’re taking a long-term view of investing, what should you do?
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As bonds have struggled, producing losses in client accounts over the past couple of years, we have had more clients ask the question: Should bonds still have a role in the portfolio?
Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk. However, over the last two years, as the Fed has worked to aggressively raise rates, this correlation has increased. What we saw in 2022 was the bonds fell right along with (and nearly as much as) stocks.
Compound that with the current state of interest rates . One of the most basic investing truisms is you should pursue investments offering a higher interest rate over investments with lower interest rates for the same level of risk. It just makes sense — of course you would want to earn more interest. Another concept involves how soon you get your investment back (liquidity). All else equal, you would want to make shorter-term loans where you would get your principal back sooner rather than later. The only way that you would be willing to lend your money for longer is if you received more interest to do so.
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However, in today’s interest rate environment, investors are earning more on short-term bonds than long-term bonds, as you can see in the chart below. And investors are earning even more on federally insured certificates of deposit ( CDs ). As the chart below shows, one-year CDs currently pay 5.8% compared to only 4.8% for a 10-year Treasury bond.
Given all this, it seems like a no-brainer to invest in the short-term options and receive the higher interest rates and better liquidity that come with them. If bonds aren’t fully dead, why not at least eliminate the default risk of lending to companies and invest only in short-term CDs and Treasury securities ? At first glance, this strategy seems brilliant and, frankly, “too good to be true.” And, of course, that is the case. This is where having a long-term investment approach comes in.
What happens a year from now?
To illustrate the point, let’s think about the longer term. What happens 12 months from now when the one-year CD matures? At that point, investors must look to reinvest the proceeds they receive. Most market pundits expect that the previously mentioned aggressive increase in interest rates by the Fed will at minimum slow the economy dramatically, if not push the U.S. economy into a recession .
If that happens, overall interest rates will fall as the Fed looks to reduce interest rates to stimulate economic growth. That makes it highly likely that investors won’t earn the current 5.8% rate if they reinvest their CDs next year.
For those who invested in a two-year CD and accepted the lower 5.1% rate, they don’t have this concern, known as reinvestment risk, for an extra year. The longer term of the current investment, the further investors can push out the concern over reinvestment risk.
When long-term bond prices will rise
Additionally, just as longer-term bonds fell when interest rates went up, the prices of long-term bonds will rise when interest rates go down. That is because investors looking to reinvest the proceeds from their maturing CDs are willing to pay extra for long-term higher rates, which are no longer available in the marketplace.
The result is that bonds in general, and long-term bonds in particular, tend to do very well after the Fed stops raising rates (the Fed left rates unchanged at its latest meeting, in December). A study by Capital Group that looked at how bonds performed after past Fed rate-hiking cycles provides room for optimism — that maintaining a bond position in your portfolio may once again provide positive returns, income and diversification benefits.
According to that study, bonds have provided returns of over 10% in the 12 months following the end of the rate-hiking cycle and have compounded at 7.1% over the next five years, well above the long-term average of 4.8%.
Bonds still play a critical role in portfolios
We still believe that bonds play a critical role in client portfolios and that beginning to shift to longer-term bonds could benefit investors over the long-term, given today’s higher interest rates. It is easy to take a short one- to two-year timeframe and wonder if the world has changed, but successful investing requires a long-term focus of seven to 10 years, incorporating full market cycles.
When you’re working with a financial adviser, they will be there to help you keep that focus and to best position your portfolio to generate the long-term returns necessary to achieve your financial plan . Bonds continue to play an important role in that goal.
- 10 Things You Should Know About Bonds
- Should You Buy Bonds Now? What to Consider
- Bond Basics: How to Buy and Sell
- What's the Deal With Bonds Right Now?
- Bond Basics: What the Ratings Mean
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .
Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc. , which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.
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Live And Let Bond (Prices Move)
- With an inverted yield curve and a lackluster start for the year for stocks, it is a good time to check whether we are swimming naked.
- The article provides a simple clear-cut explanation of the bond market and bonds.
- Long-term bonds might be risky for some, while short-term bonds might not capture the true opportunity of having an inverted yield curve.
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The famous Buffet quote about the tide seems to be misunderstood by many investors, who believe one should always swim naked until the tide is about to go down.
Only when the tide goes out do you learn who has been swimming naked ." - Warren Buffet
With a lackluster start of the year for the stock market and historically high yield in the bond market, it is a good idea to check that our proverbial swimsuit fits well, not whether or not we should be wearing one.
To this end, the article will cover the basics of bonds, an overview of the US bond market, and why I am picking iShares® 0-3 Month Treasury Bond ETF ( NYSEARCA: SGOV ) and iShares 10-20 Year Treasury Bond ETF ( NYSEARCA: TLH ) as a tactical two-piece swimsuit for the turbulent waters that may be ahead.
Bonds and stocks are usually combined in portfolios because their performance is not correlated well or, in some cases, is inversely correlated. Despite their results being inversely correlated, they are intertwined with each other and the economy.
How the bonds are played depends on the outlook of the yield curve, the perceived risk in the economy, the specific bond characteristics, and the investor's needs.
Typically, long-term bonds have a higher yield than short-term bonds, so the Yield Curve is steep, as investors want to be compensated for the lack of liquidity. When this is not the case, and the yield curve is inverted, it may indicate a recession is incoming or that unusual circumstances are at play in the economy, which is happening now.
US Yield Curve – Yearly Snapshots January 2020-2024 (Created by author with data from US Yields)
If the yield curve predicts a recession, government bonds will likely outperform a basket of corporate bonds as more businesses default on recession.
Leaving aside the question of whether or not the US economy will enter into a recession shortly, the inversion of the yield curve is an unusual condition unlikely to be maintained in the long term, as that would assume that investors prefer to have less liquidity in their assets than more liquidity.
So, in the short to mid-term, the yield curve will likely become steep or flat, which presents an opportunity. Bond prices rise when the yield goes down and fall when the yield goes up; however, the longer the duration of the bond is, the more its price will move with a shift of interest rates, all else equal.
Why SGOV and TLH?
For our proverbial swimsuit, we assume government bonds are preferable to corporate bonds as the corporate spread and defaults typically increase in recessions. Mortgage bonds might not be the best alternative because of the typically embedded option to refinance at a lower yield, and all else equal, a higher duration is preferred as it provides higher exposure to the increase in prices when the yield curve goes down.
Timing: Timing the yield curve's drop and how it will drop is an arguably impossible feat. So, selecting an individual bond maturity or a specific year of maturity is not among the options to maximize the opportunity. On the other hand, yield curve changes take time and change shape, a benefit that a single bond might not reflect.
As we saw during the pandemic, quantitative easing could likely be implemented if the economy entered a recession, and interest rates would lower to stimulate the economy relatively rapidly. In contrast, if the economy manages to avoid a recession, the normalization or steepening of the yield curve would happen more reasonably.
Inflation: the Fed is in a tight spot. Rising rates to lower inflation could constrict economic activity as saving increases and consumption decreases, which could trigger a recession. However, lowering rates might increase inflation further. While December metrics are promising, the maneuverability of rates is constrained, so unless there are drastic events, the normalization of the yield curve is likely to take time.
Yield Curve level: The current yield curve is inverted and above what has been present this century. While the correction of the yield curve could theoretically be accomplished by increasing long-term yields and leaving short-term yields at current levels, it makes more sense, following long-term targets of inflation and growth of the US economy, that long term rates equilibrium is at a lower level than what it is today.
US Yield Curve – 3-Year Snapshots January 2000-2024 (Created by author with data from US Yield data)
The chart above, while not a formal statistical model, shows the tendency to have a lower level in the interest rates and the relative rapid movement interest rates could have. The highest level in the graph is just a few years before the 2000.com bubble burst, and an exciting pattern is shown when we compare the 2008 environment with today's yield curve.
US Yield Curve – 6 Months Snapshots January 2008-2009 vs Now (Created by author with data from US Yield data)
While timing the shift in the yield curve is arguably impossible, the chart above could serve as a visual representation of how I believe the natural progression of the yield curve could be. How fast or slow that progression takes to evolve would depend on how the economy develops in the next 1-3 years.
The actual value of the Inverted Yield Curve: The unusual state of the yield curve presents two opportunities. The first one is to have a high yield paired with high liquidity, as the yield is usually lower the shorter the bond duration. For now, short-term bonds provide the opportunity to have your cake and eat it, too. That is the purpose of the first part of the bond play; SGOV ETF is built with Treasury bonds with maturities of 0 to 3 months, and it is now providing a yield of 5.24% with an expense ratio of 0.07.
SGOV info (Seeking Alpha)
The second one is to have a relatively high yield, long-term bond with the expectation of price appreciation. Most of the time, long-term bonds would yield a lower result and have a higher risk of price depreciation. This is where TLH comes in, providing a relatively high yield for the historical levels of the yield curve and the opportunity to get exposure to possible price appreciation if the yield curve steepens.
TLH Info (Seeking Alpha)
Combining these two strategies allows for the increase of yield while maintaining both liquidity and the possibility of price appreciation while the yield curve returns to a more sustainable level.
Legend has it that many great investors perform the full valuation of securities they are considering, and only after they reach a conclusion do they look up the trading price.
This is because of the anchoring bias. We tend to anchor data in our brains and unconsciously make decisions so they make internal sense with what we have anchored. The book " Thinking Fast and Slow. " Daniel Kahneman goes into much more detail about this phenomenon. He provides detailed examples of security and safety measures that used historical information to set stress limits for the systems with disastrous consequences.
Similarly, the belief that "Yields cannot go much higher" because historically they haven't been much higher, or at least not in recent history in the US, is an example of this bias. Unforeseen circumstances could cause the long-term interest rates to increase further, resulting in a price correction.
This admitted risk is partially mitigated by the pairing of short-term maturities, whose price would be less affected by the theoretical increase in the yield but would quickly provide a higher yield.
This also provides perspective on the proportion of SGOV and TLH an investor could consider. A more risk-averse inversion could prefer a higher percentage of SGOV and take advantage of its low-risk and high yield for this time. A more risk-seeking investor might prefer a higher percentage of TLH, exposed to higher risk if the yield increases but taking advantage in the long term if the curve steepens.
As we have discussed, I believe the current market conditions call for a flexible, two-piece 'swimsuit' approach. Utilizing SGOV and TLH in a barbell portfolio offers high liquidity and potential price appreciation as the yield curve normalizes. While this pair trade is not without its risks, the long-term equilibrium of the US economy is unlikely to change in the mid-term, as no drastic demographic changes have occurred that could put this into question. So, there is a reasonable expectation that the yield curve will steepen in the long term.
Last year, I returned to Seeking Alpha after obtaining the CFA designation and set to document how I am fixing my portfolio. A significant part of how I am fixing the portfolio is balancing exposures and eliminating biases present in the portfolio.
These two ETFs are good examples of both. While typically 20-30-year bonds are considered conservative low-risk plays, those securities have lost value in the past three years due to the drastic changes in the yield curve. At the same time, short-term bonds are usually low-yielding and have provided a relatively good return in this time frame.
Separately, these ETFs might not fit many investors' needs or risk profiles but are put together in this mini barbell portfolio; one can customize the exposure and risks they provide.
In the past months, I have written two articles about a possible recession or slowdown of the economy, one touching on the subject of antifragility and another about stock macro shifts in choppy waters. As Taleb points out in Antifragile, predicting is a poor use of time in chaotic systems, while preparing is a much better use of resources. I believe this is the right approach when dealing with volatile situations.
This article differs from my regular stock articles as the underlying is different. So, it is proper to clarify that this is not a recommendation on how to build a bond portfolio. The purpose is to provide context on the bond market, how I believe it will evolve, and how I play a part in my fixed-income portfolio. There are many considerations for individual investors not covered here, like tie horizon, tax situation, and risk profile, which are not covered here and might make other alternatives more suitable.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TLH, SGOV either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Are gold bars and coins a good investment in 2024? Here's what experts think
C onsumers have flocked to gold investments over the last year, largely thanks to inflation, geopolitical tensions and economic instability. There's more than one way to invest in gold, though. Investors can open a gold IRA , buy shares in gold stocks , or, as many consumers have lately, go the traditional route and buy gold bars and coins .
Are you also considering buying gold bars or coins in 2024 ? Below, we'll break down when buying physical gold bars and coins might be a good move, according to experts.
Start by reviewing your gold investing options here to learn more .
Are gold bars and coins a good investment in 2024?
Here a few ways to determine if gold bars and coins will be a worthwhile investment for you this year.
You want something tangible that's always in demand
One of the biggest benefits of buying physical gold is that, unlike stocks, bonds, or mutual funds, it's tangible. You can hold it in your hands — see it and feel it for yourself.
"It can provide a sense of ownership and security," says Sankar Sharma, investing educator and CEO of RiskRewardReturn.com.
Physical gold is also scarce and in high demand worldwide. As such, it can be bought and sold fairly easily — a nice perk if you need to retain liquidity or have access to fast cash in a bind.
"Gold continues to be in limited supply and there is growing demand from all over the world," says Alex Ebkarian, co-founder of Allegiance Gold. "Members of the BRICS countries — Brazil, Russia, India, China, and South Africa — are still considering forming a single currency backed by gold, increasing its demand."
Learn more about investing in tangible, physical gold here now .
You want protection from inflation, recession or political turmoil
A key reason gold investments have surged lately is inflation . The precious metal has long been touted as a smart hedge against inflation, allowing investors to retain their wealth even while local currencies lose value. As Ebkarian explains, "Gold is not tied to any specific currency. It protects your portfolio against dollar devaluation and fluctuations in exchange rates."
It's also considered a safe haven asset and can help protect your money in times of geopolitical tension or during shifts in political leaders or policies. This is because physical gold is, again, tangible, which "minimizes counterparty risks," says Collin Plume, founder of Noble Gold Investments.
"In other words, physical gold investors are not reliant on the financial health or performance of a third party, such as a bank or a mining company, for their investment to accrue value," Plume says.
Recent gold prices back up Plume's sentiments. In early October, gold cost roughly $1,800 per ounce. Today, it's over $2,000 per ounce and it could go higher .
You plan to keep it for the long haul
Finally, buying physical gold bars and coins might be wise if you plan to hold onto it for a while. Unlike stocks and many other investments, it generally won't deliver much in short-term returns. Instead, it's better used as a long-term investment — one that can store your wealth and potentially grow it over a period of many years.
"Physical gold is a mid- to long-term investment," Ebkarian says. "It's not for day trading."
Just be prepared to ride out any waves. In the early 2010s, for instance, gold prices dropped considerably and held there for years. They've since recovered — and then some — so investors who held onto their investments during that downturn could see considerable returns at today's prices. "Gold's track record over the long-term is impressive," Ebkarian says.
Understand the downsides
While buying physical gold can be smart in some cases, it's not right for everyone — and it has its downsides, too. For one, you'll need to secure storage for it, which could mean a hefty annual fee.
"Physical investments in gold have additional complications," says Carla Adams, founder of Ametrine Wealth. "You have to find a safe place to store the gold — which, for many, means paying for the storage of the gold. You'll also want to purchase insurance on the gold."
There's also the risk of buying counterfeit gold if you're not careful where you buy it and there could be pricey dealer markups as well.
"The cost of buying physical gold can be expensive," says Matt Dmytryszyn, chief investment officer at investment advisory firm Telemus. "Depending on the size of the investment, you have to safely transport and store the commodity. There are also transaction costs to purchase and sell the gold."
Alternatives to gold bars and coins
If you're interested in investing in gold in 2024 , there are many ways to go about it. Rather than buying gold bars and coins and holding them yourself, you could open a gold IRA — a type of retirement account that lets you buy physical gold and precious metals to grow your nest egg.
You can also invest in gold mining stocks, futures or ETFs , which are traded on major stock exchanges. Ebkarian says gold ETFs are a good option for investors who want exposure to gold but not the hassle or fees of storing it.
"Gold stocks, ETFs, and futures would be my top three choices going into 2024," says Carlos Dias Jr., a financial advisor at Dias Wealth. "Gold stocks and ETFs can pay dividends, while futures can potentially provide the liquidity that an investor is seeking."
Whatever you do, Dias says be careful not to over-invest in gold. While gold can make for a good diversifier, you usually don't want more than 5% to 10% of your portfolio invested in it.
Think of it "as small, strategic seasoning, not the main course," Dias says. "Focus on building a well-rounded, diversified portfolio that can weather any storm. That's the recipe for true financial security."
Learn more about investing in gold online today .
Rating Action Commentary
Fitch Downgrades Lions Gate's IDR to 'B-'; Upgrades Unsecured Bonds to 'B'; Outlook Stable
Tue 09 Jan, 2024 - 5:26 PM ET
Fitch Ratings - Toronto - 09 Jan 2024: Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Lions Gate Entertainment Corp., Lions Gate Entertainment Inc. and Lions Gate Capital Holdings LLC (collectively, Lions Gate) to 'B-' from 'B'. Fitch has also downgraded the company's senior secured ratings to 'BB-'/'RR1' from 'BB'/'RR1'. The unsecured bonds have been upgraded to 'B'/'RR3' from 'B-'/'RR5' due to prior debt retirement. The Rating Outlook is Stable.
The downgrade reflects Lions Gate's increase in leverage following its December 2023 acquisition of eOne that included the assumption of production loans. Although Lions Gate intends to repay debt using equity proceeds raised from the recently announced merger of its studio business into a special purpose acquisition company (SPAC), Fitch expects leverage will remain elevated for longer than was previously anticipated. The Outlook reflects the company's increased scale following the inclusion of eOne's content library and improved operational performance particularly in the Starz segment.
Key Rating Drivers
Increased Leverage Post Transactions: Lions Gate announced or has completed several transactions that are expected to drive pro forma Fitch-calculated leverage into the low 10x range. The downgrade was driven by Fitch expectations that the company will remain outside its prior rating sensitivities for longer than was previously anticipated. Fitch notes its leverage calculations include production loans, which increased with the eOne acquisition, and non-recourse working capital facilities that were put in place to monetize payments due from tax incentive credits and accounts receivables.
eOne Acquisition: Lions Gate completed the acquisition of eOne's film and television platform in December 2023 for $375 million (6.0x EBITDA multiple) including the assumption of production financing loans. The transaction adds over 6,500 titles across film, scripted and unscripted content to Lions Gate's existing library of content. Titles acquired include ABC franchise The Rookie , Showtime series Yellowjackets and Discovery's unscripted Naked & Afraid . Fitch believes eOne will provide increased scale for Lions Gate and further strengthen the value proposition for Lionsgate Studios (LGS) as a platform-agnostic, pure play content company. Fitch projects this will increase Lions Gate's run-rate scale by nearly 14% (revenues) and 15% (EBITDA).
S tudio Separation : Lions Gate intends to separate its studio business and combine it with Screaming Eagle Acquisition Corp. (SEAC), a SPAC, to launch LGS. Lions Gate will retain 87.3% ownership of LGS and receive $350 million in gross proceeds for the remaining 12.7% stake held by external investors in SEAC. Post transaction, Lions Gate will be the ultimate parent for LGS (through SEAC). The transaction implies an enterprise value (EV) of $4.6 billion for LGS (10.7x FY25 EBITDA). Fitch believes that the quasi separation, structured as a subsidiary IPO, was undertaken to raise capital from new investors, place a floor value on the studio business, and is a step towards full separation of LGS from Starz at an undisclosed future date.
Following the merger of the studio business with SEAC, LGS will assume approximately $1.5 billion of intercompany debt which will mirror the terms of the Credit Agreement and the Bond Indenture currently held by Lions Gate. Management confirmed there will be no changes to the existing credit agreement and the bond indenture as the collateral, guarantees and asset pledges will remain the same. The debt service obligations will continue to be financed by cash flows from LGS and Starz and there will be no restrictions on paying down debt using cash flows from LGS.
Additional Investment in 3Arts : Lions Gate announced an additional equity investment in 3 Arts, a production and talent management company. 3 Arts is a significant contributor to Lions Gate's television slate including productions for platforms such as Apple+ (Mythic Quest, Manhunt ) , Starz (The Serpent Queen, Hunting Wives ) and Max ( Julia ) . The incremental investment increases Lions Gate's ownership stake in 3 Arts to over 70%.
Commitment to Deleveraging : Lions Gate was placed on Negative Outlook on Jan. 31, 2023 due to operating issues remaining from the pandemic and uncertainty about the performance of theatrical releases in FY23 and FY24. During 2023, Lions Gate was able to delever faster than Fitch's expectations, reducing Fitch-calculated leverage to 8.2x at Sept. 30, 2023 from 26.4x at Sept. 30, 2022 due to theatrical releases outperforming expectations and improved operational performance in the Starz distribution segment. In addition, Lions Gate repurchased approximately $266 million principal amount of its 5.5% senior notes using FCF.
Fitch notes Lions Gate has committed to using a portion of proceeds from the SPAC transaction for debt repayment. Although Fitch included the expected repayment in its pro forma calculation above, leverage is expected to remain elevated over at least the near-term.
The 'B-' rating reflects heightened credit risk from the increased leverage and Fitch's expectation that the company will stay outside ratings sensitivities for longer than previously anticipated. The Stable Outlook reflects Lions Gate's film library, which expanded with the eOne acquisition, scale, leadership in film and television content production, and the Starz-branded premium subscription video services and the relative stability of the company's media networks business.
Fitch includes the $2.4 billion of outstanding production loans and non-recourse working capital facilities generally held by SPVs (and secured by all rights to a specific picture, including copyrights, rights to produce and distribution rights) in its estimation of debt which is consistent with Fitch's corporate rating criteria and our belief that these production loans are important financing channel for Lions Gate and as such, the company is unlikely to let any specific SPV default on a production loan obligation which could increase borrowing and collateral requirements for future film financing.
Per Fitch's criteria on accounts receivables sales, we have adjusted debt to include the $587 million of outstanding accounts receivables and $234 million of production tax credit facility that the company has monetized as of Sept. 30, 2023. While the receivables sale transactions are non-recourse to Lions Gate, the programs relate to its recurring business.
Lions Gate has utilized these working capital programs as an alternative source of funding (more efficient from a cost of capital perspective by taking advantage of the high creditworthiness of the counterparties - investment grade customers and governments) than relying on other debt instruments (i.e. revolver) to support operations. As such, Fitch adjusts Lions Gate's metrics to improve comparability of credit metrics with other issuers while recognizing that the majority of receivables monetized have multi-year tenors and would not come back onto Lionsgate's balance sheet should this financing no longer be available in the future.
The ratings also incorporate the inherent 'hit driven' volatility of the film and television content business, the company's smaller relative scale which require it to rely more heavily on co-financing and co-production arrangements to offset the high upfront content costs, and the overall rising costs of premium content production owing to increasing competition from other media companies (e.g. Netflix, Apple, Amazon), mitigated in part by Lions Gate's international theatrical pre-licensing model and lower theatrical P&A expenses as well as the diversification of its film and television slates.
--LGS and SEAC merger completed Spring 2024;
--Revenue growth in the low to mid-double digits per year (including impact of revenue from the acquisition of eOne) in the medium term;
--Approximately $60 million in run-rate post synergy EBITDA for eOne for FY24 and FY25 in line with management's expectations;
--Gradual improvement to EBITDA margins to low teens over the rating horizon;
--Paydown of production loans over the rating horizon.
Fitch's recovery analysis for Lions Gate incorporates an independent third-party valuation of Lions Gates' film and television library. Fitch believes that in the event of a bankruptcy Lions Gate could monetize its library in order to generate funds to pay lenders. Fitch believes the growth of streaming services has created an excess demand for content, and Lions Gate, which specializes in content production, is well positioned to benefit from the current market.
The third-party valuation of Lions Gate's library was completed using March 31, 2021 year-end data on unsold library rights and was undertaken by a reputable consulting firm with expertise in this area. For the purpose of the analysis, the consulting firm relied on unsold rights forecasts provide by management by title, media platform, and territory.
Fitch calculates its going concern (GC) EBITDA after adjusting for estimated EBITDA associated with the company's library and SPVs holding production loans and non-recourse production tax credits. A multiple of 8.0x was applied to the GC EBITDA to form the estimated enterprise value of the remaining business. Estimated library sale proceeds are then added to form the basis of Fitch's recovery estimate. A 10% administrative fee was assumed.
In arriving at the 8x multiple Fitch considered recent peer multiples in the marketplace. MGM, one of Lions Gates closest competitors, was acquired by Amazon for a multiple of approximately 49x EBITDA. Also, RHI Entertainment, a television content business, emerged from bankruptcy at a 7.4x multiple of post-emergence EBITDA in 2011. Given the elevated valuations in the content production space, Fitch believes that an 8.0x emergence multiple is reasonable.
Applying the Fitch estimated enterprise value of the business to the securities and using standard notching criteria, Fitch arrives at an IDR of 'BB-'/'RR1' on the first lien debt and a rating of 'B'/'RR3' on the unsecured debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--A material asset sale with the asset sale proceeds applied to debt repayments;
--EBITDA Leverage below 7.0x;
--Sustained operating margins in the mid-teens.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Sustained negative FCF;
--Expectations of EBITDA Leverage remaining above 8.0x over the next 18 months-24 months;
--Sustained underperformance of Lions Gate's film and production segments and/or notable churn in Starz's subscriber base.
Liquidity and Debt Structure
As of Sept. 30, 2023, debt at the company includes:
--Term Loan A: $414.9 million maturing April 6, 2026;
--Term Loan B: $825.4 million maturing March 24, 2025;
--5.5% senior notes: $715 million maturing April 15, 2029;
--Production loans and working capital facilities ($2.4 billion): Fitch includes $2.4 billion of outstanding production loans and non-recourse working capital facilities in its estimation of debt. Fitch notes the non-recourse working capital facilities enhance Lionsgate's access to alternative sources of liquidity, reduce the company's cost of capital and add to the company's financial flexibility.
An undrawn revolver of $1.25 billion maturing April 6, 2026.
Strong Liquidity: As of September 2023, liquidity consists of $224 million in cash and $1.25 billion in revolver availability.
Lions Gate is a vertically integrated filmed entertainment and television content production company with a library of over 20,000 titles and linear and digital distribution platforms (Starz).
Sources of Information
Fitch made use of an independent third-party library valuation, dated Oct. 27, 2021, in arriving at Fitch's recovery enterprise value.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria listed below. In addition, the following sources of information which are not discussed in the criteria were used:
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores .
- senior unsecured
- senior secured
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
- Parent and Subsidiary Linkage Rating Criteria (pub. 16 Jun 2023)
- Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 13 Oct 2023) (including rating assumption sensitivity)
- Corporate Rating Criteria (pub. 03 Nov 2023) (including rating assumption sensitivity)
- Sector Navigators – Addendum to the Corporate Rating Criteria (pub. 03 Nov 2023)
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 ( 1 )
- Dodd-Frank Rating Information Disclosure Form
- Solicitation Status
- Endorsement Policy