The 60/40 fairness–bond portfolio stays a extensively used benchmark for long-term asset allocation, regardless of ongoing debate about its optimality (Pham et al., 2025). For a lot of households, nevertheless, the problem lies not within the framework itself however within the quantity of capital required to implement it. Restricted investable belongings, a want to keep away from express borrowing, important publicity to residential actual property, and the necessity to keep liquid reserves usually constrain the flexibility to completely fund a standard allocation.
Leveraged ETFs supply an alternate. Fairly than growing danger, they permit households to attain a desired danger publicity with much less deployed capital, enhancing the administration of liquidity, real-estate leverage, and broader balance-sheet constraints. As illustrated under, leveraged ETFs mixed with money holdings can approximate the chance traits of a standard 60/40 portfolio whereas avoiding margin accounts, private credit score traces, or different types of household-level leverage.
By separating market publicity from capital dedication, this framework preserves liquidity and monetary flexibility whereas sustaining a well-known asset allocation profile.
Motivation: Asset Allocation on the Family Degree
For many retail buyers, portfolio building takes place inside the constraints of the family steadiness sheet, the place housing publicity, mortgage leverage, employment revenue danger, and liquidity wants form possible funding selections. Many households are already structurally leveraged by actual property. Over latest a long time, rising house values in developed economies have elevated internet price whereas concurrently concentrating danger in illiquid belongings. Because of this, buyers usually discover themselves chubby actual belongings and underweight liquid monetary capital.
Conventional types of monetary leverage introduce further dangers that many retail buyers are unwilling or unable to bear, together with margin calls throughout drawdowns, fastened reimbursement obligations on credit score traces, and behavioral pressures that may result in poorly timed de-risking or compelled liquidation in periods of heightened volatility.
In distinction, when used thoughtfully, leveraged ETFs—whose leverage is contained on the fund degree relatively than the family steadiness sheet—permit buyers to separate market publicity from capital deployment, offering larger flexibility in family portfolio building.
Methodology and Portfolio Building
The next evaluation evaluates whether or not a portfolio constructed from leveraged fairness and bond ETFs mixed with money can approximate the return and volatility traits of a standard 60/40 fairness–bond portfolio, with out counting on margin, private borrowing, or different types of household-level leverage[1].
Benchmark and Devices
The goal allocation is a traditional 60/40 portfolio consisting of:
- 60% publicity to the S&P 500
- 40% publicity to US Treasuries, represented by a length of roughly seven years
To implement these exposures, the evaluation employs the next devices:
- A hypothetical ETF offering thrice the every day return of the S&P 500
- A hypothetical ETF offering thrice the every day return of long-duration US Treasuries (20+ 12 months maturity; length ≈16), with place measurement scaled to attain the goal portfolio length
- Money incomes the in a single day price
Though the leveraged Treasury instrument has an extended underlying maturity, its portfolio weight is scaled such that the ensuing efficient length of the mixed portfolio approximates the seven-year goal.
Price and Financing Assumptions
To higher approximate real-world efficiency, the next assumptions are included:
- Annual administration expense ratio (MER): 1%
- Fund-level borrowing price: in a single day price + 50 foundation factors
- Money earns the in a single day price
Portfolio Building Course of
Fairly than fixing nominal portfolio weights, the technique targets secure efficient market exposures:
- An fairness publicity equal to roughly 60% of the S&P 500
- A Treasury length of roughly seven years
At every month-end, portfolio weights are adjusted to keep up these publicity targets. Fairness and bond ETF allocations are scaled to attain the specified fairness publicity and portfolio length, with residual capital allotted to money. Month-to-month rebalancing is required to offset publicity drift arising from the every day reset nature of leveraged ETFs.
Because of the every day reset nature of leveraged ETFs, efficient exposures drift over time, necessitating periodic rebalancing. Over the pattern interval, the ensuing common portfolio weights are roughly 20% within the leveraged fairness ETF, 15% within the leveraged Treasury ETF, and 65% in money.
Noticed Outcomes and Comparability to 60/40
The technique is again examined utilizing month-to-month knowledge from 31 December 2022 by 31 December 2024 and evaluated towards a standard 60/40 benchmark (Desk 1). Over the pattern interval, the leveraged ETF plus money portfolio delivers cumulative returns broadly corresponding to the benchmark. Extra importantly, realized volatility intently tracks that of the standard 60/40 portfolio, indicating that the exposure-targeting framework is efficient in replicating first-order danger traits.
Desk 1 (Abstract Statistics)
Monitoring Variations
Durations of divergence between the 2 portfolios are primarily pushed by:
- Each day leverage reset results throughout risky markets
- Embedded financing prices inside leveraged ETFs
- Month-to-month rebalancing frequency
- The prevailing money yield surroundings
These elements introduce monitoring error however don’t materially alter the portfolio’s total danger profile.
Determine 1 (Annual Returns)
Determine 2 (Allocation %)
Distributional Results
Whereas imply returns and volatility are comparable, the leveraged portfolio displays fatter tails relative to the standard 60/40 portfolio. This displays the nonlinear return dynamics launched by every day leveraged devices, particularly in periods with excessive volatility.
Determine 3 (Return Distribution)
Sensible Dangers and Limitations
Whereas the framework illustrates a capital-efficient method to publicity administration, it includes necessary trade-offs that warrant cautious consideration. Leveraged ETFs are designed to trace multiples of every day index returns; over longer holding intervals, their efficiency turns into path-dependent resulting from every day leverage resets, with volatility drag growing nonlinearly as leverage rises (Pessina and Whaley, 2021).
As well as, the evaluation depends on hypothetical leveraged ETFs, and realized efficiency of precise merchandise might deviate from modeled outcomes, significantly in periods of market stress. Lastly, though common volatility might align with a standard 60/40 portfolio, the usage of leverage will increase tail danger, implying the next probability of utmost outcomes.
Determine 4 (Drawdown)
Capital Effectivity as Portfolio Design
Leveraged ETFs are steadily dismissed as unsuitable for long-term buyers resulting from volatility drag and path dependency. This evaluation reveals that, when employed inside a disciplined and exposure-managed framework, leveraged ETFs can as an alternative perform as instruments for enhancing capital effectivity relatively than growing portfolio danger. By replicating the chance traits of a standard 60/40 fairness–bond portfolio with considerably much less invested capital, this method permits households to protect liquidity and mitigate focus arising from residential actual property publicity. Whereas cautious implementation and ongoing danger consciousness stay important, the framework highlights an underappreciated software of leveraged devices in trendy family portfolio building.
References
All knowledge in Tables and Figures sourced from Bloomberg
Pessina, C. J., & Whaley, R. E. (2021). Levered and Inverse Trade-Traded Merchandise: Blessing or Curse? Monetary Analysts Journal, 77(1), 10–29. https://doi.org/10.1080/0015198X.2020.1830660
Pham, N., Cui, B., & Ruthbah, U. (2025). The efficiency of the 60/40 portfolio: A historic perspective (Analysis Report). CFA Institute Analysis & Coverage Heart. https://rpc.cfainstitute.org/analysis/stories/2025/performance-of-the-60-40-portfolio
[1] This framework is introduced for instructional functions solely and shouldn’t be interpreted as an funding advice.
