Thanks for the good examples of volatility drag. This is very important for something as volatile as Russia. However, there is a tendency when valuations are very far from the mean to have large runs towards the mean. One example of a consistent run was from 1/​30/​2015 to 5/​15/​2015 in 3.5 months the base index, RSX, went up 39%. During the same time, RUSL went up 137%. Cubing would imply 167% increase, so not bad. Of course there is no guarantee that this will happen, but if it does, the investment will make a lot of money. But you are correct that if mean reversion takes a long time, leverage may be no better than the underlying index, and could even be negative returns.
Mean reversion plays generally have a timeline of years; I assumed that’s what you were proposing. This should be obvious from the fact that you could have made the exact same mean reversion argument at the end of 2014 (2014′s massive drops from the Ukraine crisis were when Russia arguably became undervalued according to your metrics), but actually RSX barely moved in 2015 as a whole. Sure if you cherry-pick the high in May 2015 you do well; hindsight-based cherry-picking always does well.
Over very short time frames (like <6 months), RUSS/​RUSL are probably fine because there’s limited opportunity for the transaction costs to build up. That is in fact what they are intended for; short-term bets. But if you’re investing on the timeline of years, they’re really bad, which is hopefully amply demonstrated by the (non-cherry-picked) data I gave for the last few calendar years.
Indeed, I did invest in non-leveraged Russia in 2014 because it was undervalued. But only now that it is extremely undervalued am I willing to make the bet on rapid upward movement where it makes sense to have leverage.
Thanks for the good examples of volatility drag. This is very important for something as volatile as Russia. However, there is a tendency when valuations are very far from the mean to have large runs towards the mean. One example of a consistent run was from 1/​30/​2015 to 5/​15/​2015 in 3.5 months the base index, RSX, went up 39%. During the same time, RUSL went up 137%. Cubing would imply 167% increase, so not bad. Of course there is no guarantee that this will happen, but if it does, the investment will make a lot of money. But you are correct that if mean reversion takes a long time, leverage may be no better than the underlying index, and could even be negative returns.
Mean reversion plays generally have a timeline of years; I assumed that’s what you were proposing. This should be obvious from the fact that you could have made the exact same mean reversion argument at the end of 2014 (2014′s massive drops from the Ukraine crisis were when Russia arguably became undervalued according to your metrics), but actually RSX barely moved in 2015 as a whole. Sure if you cherry-pick the high in May 2015 you do well; hindsight-based cherry-picking always does well.
Over very short time frames (like <6 months), RUSS/​RUSL are probably fine because there’s limited opportunity for the transaction costs to build up. That is in fact what they are intended for; short-term bets. But if you’re investing on the timeline of years, they’re really bad, which is hopefully amply demonstrated by the (non-cherry-picked) data I gave for the last few calendar years.
Indeed, I did invest in non-leveraged Russia in 2014 because it was undervalued. But only now that it is extremely undervalued am I willing to make the bet on rapid upward movement where it makes sense to have leverage.